What is in a building contract?
There are normally three documents in building contracts:
- The building contract. This is a legal document. It sets out the role, rights and responsibilities of the consumer and the builder. A number of standard form contracts are available. If you are unsure about which one is appropriate for your project, you should consult your lawyer.
- The specification. This is a listing of the work to be carried out, the items to be supplied and installed by the builder and the manner in which certain work is to be undertaken. It is a technical document and you should consult the builder or an architect if you are unsure about its contents.
- The drawings or plans. These are prepared by either a draftsperson or architect. Review them carefully to ensure that they detail the work in accordance with your intentions. Ensure they have been approved by the building surveyor and bear their stamp of approval.
To avoid any later confusion, at contract signing time, request at least two copies of all contract documents and ensure you and the builder sign each page of each document.
Contractual terms – all contracts
The DBC Act contains provisions that apply to all contracts for domestic building work. It contains more onerous provisions that apply to contracts for major domestic building work, being contracts for domestic building work with a value of more than $10 000. This section deals with the provisions that apply to all domestic building contracts.
Section 8 of the DBC Act implies in all contracts for domestic building work the following warranties:
- the builder will carry out the work in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;
- the materials to be supplied by the builder will be good and suitable for the purpose for which they are used and, unless otherwise stated, those materials will be new;
- the work will be carried out in accordance with, and will comply with, all laws and legal requirements;
- the work will be carried out with reasonable care and skill and will be completed by the date specified by the contract;
- the work will be suitable for occupation; and
- if the contract states a particular purpose for the work, the work and the materials used will be reasonably fit for the purpose.
These warranties are covered by home warranty insurance (see ‘Insurance’), which is supplied by the builder for works in excess of $16 000. Importantly, these warranties attach to the building and can be called upon by subsequent buyers of the home. Buyers of residential properties have the benefit of these warranties for a period of 10 years, commencing from the date of the occupancy permit.
For further information about contracts and warranties, see Chapter 7.3: Consumer guarantees.
A builder must not demand or receive a deposit of more than:
- 5 per cent of any contract where the contract price is $20 000 or more; or
- 10 per cent of any contract price less than $20 000.
Section 15 of the DBC Act places restrictions on cost-escalation clauses. Such clauses are common in building contracts and provide for an increase of the contract price in certain circumstances, such as variations in the building works, and delays caused by the owner. A cost-escalation clause in a domestic building contract is void unless the contract contains a notice in the prescribed form alerting the consumer to the effect of the clause and the consumer signs or initials the clause in the contract.
If, during construction, a builder asks for more money than has been allowed in the contract price, review the contract carefully before agreeing to payment. For example, a builder cannot demand more money because of wage increases or inflation. Check all builder demands against the cost-escalation clauses that you signed or initialled at the time you signed the contract.
Prior to the DBC Act, it was common practice for builders to place a caveat on the owner’s property. The caveat provided the builder with some security and leverage in respect of payment. Section 18 of the DBC Act has abolished this practice. It provides that a domestic building contract does not entitle a builder to place a caveat on the owner’s property title.
Some builders have sought to overcome this provision by requiring owners to sign a side agreement that, strictly speaking, is not a domestic building contract and therefore falls outside the prohibition under the DBC Act. Consumers should avoid signing any such side agreements.
Provisional sum and prime cost items
Consumers should always try to ensure that every item of work and all material is properly priced, and that price is fixed in the contract. However, this is not always possible. Some items to be included in the work are not agreed prior to the signing of the contract, for example, tile selection, white goods, or tapware may be decided after a building work is commenced. In respect of these items, the builder normally estimates and includes a prime cost item.
Similarly, certain works may not be agreed prior to the contract being signed (e.g. fencing, landscaping and painting) and for these works a builder will normally estimate and include in the building contract a provisional sum.
Most contracts allow the builder to charge a substantial loading if the consumer spends more than the agreed estimate for a prime cost item or provisional sum. Section 21 of the DBC Act requires a builder to provide a reasonable estimate for provisional sums and prime cost items. Further, before entering into the building contract a consumer must receive a list containing a detailed description of each item of work, a breakdown of the cost estimate for each item or sum and how the builder proposes to charge for any excess amount.
The estimate for prime cost items and provisional sums is included in your fixed contract price. Try to avoid including prime cost items and provisional sums in your contract by agreeing on all work and materials before signing the contract. If they are necessary, ensure that a reasonable allowance is made. Clarify in writing whether the allowance includes or excludes the Goods and Services Tax (GST).
Builders must provide consumers with copies of invoices, receipts or other documents that show the cost of any prime cost item or provisional sum.
The builder must give the consumer a legible copy of the contract. The builder is also required to provide a copy of any notice, order or other document that the builder receives in relation to the building work from any public statutory authority.
Be careful about GST. Does the contract price include or exclude GST? If you are unsure about GST, consult your accountant. Avoid verbal agreements or assurances about GST, or about other contract matters; make sure everything is in writing.
Contractual terms – major domestic building work
The DBC Act places more onerous provisions on builders in contracts for major domestic building work (i.e. where the contract price is more than $10 000). These provisions are discussed in this section.
Given the requirements of the DBC Act, only certain building contracts are suitable for domestic building work. Consumer Affairs Victoria has prepared a model domestic building contract that can be downloaded from its website (www.consumer.vic.gov.au).
It is important that consumers obtain legal advice before signing any building contract.
The construction of footings and slabs can sometimes involve additional work, resulting in significant increases to the contract price. To protect consumers against these uncertainties the DBC Act requires a builder to thoroughly investigate the site prior to preparing a footings or foundation design.
The DBC Act (s 30) requires a builder to obtain all reports, surveys and test results necessary for the preparation of a proper footings (slab) design and an adequate estimate of the cost of constructing the footings. The DBC Act sets out the matters a builder must take into account in preparing a footings design. The builder’s responsibility for obtaining adequate foundations data is not altered if the builder receives soil information about the site from the consumer. If the builder believes this information is not adequate, they must make their own enquiries.
This work is normally paid for by the consumer and carried out before a contract is entered into.
A builder cannot require a consumer to pay additional money in respect of footings work if this additional work could have been reasonably ascertained before construction commenced.
Some builders allow contingency sums in the contract to cover any additional foundation work. Consumers should attempt to minimise these contingency sums. Consumers should insist that the builder comply with the DBC Act and undertake the necessary investigative work and prepare and cost a proper footings design.
Some builders require owners to enter a preliminary agreement covering items such as foundations data, surveying the site, a structural engineer’s report and design and preparing preliminary designs and drawings. These are important agreements. Owners should ensure that the preliminary agreement does not require them to assign or transfer intellectual property or copyright in any design work to the builder. Unless the owner retains copyright in the work, they cannot give the design to another builder to construct.
Important contractual provisions
The DBC Act sets out in some detail what must be included in a contract for major domestic building works.
Section 31 of the DBC Act requires that the contract, among other things, must:
- be in writing;
- provide a detailed description of the work;
- include plans and specifications;
- state the names and addresses of the parties;
- state the registration number of the builder;
- provide a start date or how that date is to be determined and, if the start date is not known, require the builder to do everything that is reasonably possible to ensure the work will start as soon as possible;
- state a date when the work will finish or a number of days that will be required to finish the work once it is started; and
- state a contract price.
A consumer may withdraw from a major domestic building contract at any time before the expiration of five clear business days after they receive a copy of the signed contract (this is called a ‘cooling-off period’). Contracts are required to contain a written notice advising consumers of the cooling-off period. If a consumer wishes to ‘cool-off’ they simply complete the notice and serve it on the builder in accordance with the contract provisions.
A consumer cannot ‘cool-off’ if they have previously entered into a similar contract for the same work or have received legal advice before entering into the contract.
If a consumer withdraws from the contract the builder may retain, out of any money already paid, $100 plus any other out-of-pocket expenses. The builder must refund all other money.
Two major issues in any building contract are contract price variation and completion date extensions.
Variation to contract price
Variations to the contract price may arise at the request of either the consumer or the builder. Changing your mind about the works after the contract has been signed can be costly.
Should a builder request to vary the plans or specifications, the builder must give the consumer written notice of the variation, state why the variation is necessary and state the time it will take to complete the works. The builder must also provide a cost of the variation and state the effect it will have on the contract price.
Unless a building surveyor requires a variation, a builder cannot carry out any variation without the signed written consent of the consumer.
The DBC Act and most building contracts limit the circumstances in which a builder can request additional money for variations. Consumers should familiarise themselves with the relevant contract provisions before agreeing to pay any additional money. Under the DBC Act (s 37), a builder is not entitled to recover any money in respect of a variation unless the builder can establish that the variation is both necessary and could not have been reasonably foreseen at the time the contract was entered into.
If a consumer wishes to vary the works, they must provide a written notice to the builder requesting a variation. If the variation is of a very minor nature (i.e. it will not add more than two per cent to the contract sum), the builder may carry out the variation However, be careful, as in large projects two per cent may amount to significant additional expenditure.
In all other circumstances the builder must give the consumer a notice stating:
- whether the variation will require a variation to the building permit;
- whether the variation will result in any delays;
- an estimate of the delays; and
- an estimate of the cost of the variation and its effect on the contract price.
A builder cannot proceed with a variation requested by the consumer unless the consumer signs and returns the variation notice to the builder.
Delays and extensions of time
Major domestic building contracts must specify a date when the work will be finished, or the number of days that will be required to finish the work. Most contracts allow builders to claim an extension to the finish date when their work is delayed. A lazy or disorganised builder who has fallen behind schedule may deliver a number of requests to extend the finish date towards the end of the project.
Consumers should carefully read the provisions in their contract dealing with delays and extensions of time. Normally building contracts only permit extensions of time in certain circumstances that are beyond the builder’s control; for example, inclement weather, certain industrial disputes, delays by the consumer, and variations to the plans requested by the consumer. Consumers should carefully scrutinise a builder’s claims for extensions of time to ensure they are allowed by the contract.
Section 32 of the DBC Act requires a builder to make allowances in the contract for inclement weather, public holidays, weekends, rostered days off and any other delays. These allowances must be exhausted by the builder before the builder is entitled to extend the completion date under the contract.
Each day on site involves the builder in some costs, for example, the hire of equipment and labour. As such, delays caused by the consumer normally attract a claim for additional money. So, a consumer should be careful to avoid delaying the builder’s work.
Consumers are advised to keep a written record of the daily progress of the project. Note who is on site, what work is undertaken and the weather conditions; also take regular photos of the state of the work. Always monitor the finish date, as adjusted from time to time.
Liquidated damages are a pre-estimate of the daily or weekly costs to the consumer of any delays. These costs are normally calculated with reference to rental and finance costs. A builder is liable to pay liquidated damages if they are late in completing the work and such costs are normally deducted from the progress payments that are payable to the builder.
You should ensure that the contract allowance for liquidated damages is sufficient to cover all costs you will incur if the project is delayed.
Talk regularly with the builder about the progress of the works and discuss any concerns you have as soon as they arise.
Building contracts normally provide for payments to be made to the builder at various stages of the work. Section 40 of the DBC Act regulates the amount that can be claimed by the builder on completion of each stage of the building works.
In a contract to build all stages of a home, a builder cannot claim more than:
- deposit: 5 per cent;
- base stage: 10 per cent;
- frame stage: 15 per cent;
- lock-up stage: 35 per cent;
- fixing stage: 25 per cent.
Ensure you are familiar with the progress payment provisions in your contract. Ensure your cash flow is adequate. Check to see that the stage is completed by the builder and that they are entitled to payment. A registered building inspector can assist you with this important task.
Definitions of work stages and an explanation of how the restrictions operate can be found in section 40 of the DBC Act. The restrictions will not necessarily apply if the contract is being administered by an architect and the builder is paid monthly. In this case, the contract should contain an appropriate disclosure to the consumer that the limitations under section 40 do not apply.
If the work is being financed, the bank may wish to inspect the work periodically before releasing funds to the builder.
Progress payments should be paid within the time allowed by the contract. Failure to pay the builder on time may attract interest. It is also a breach of the contract by the consumer.
Do not commit to a large upfront payment to the builder. Such payments are fraught with risks should the builder later encounter financial difficulties. It may mean that there is not enough money left to complete the work. If the builder becomes insolvent, such payments may not be recovered. Home warranty insurance limits the amount of payments that are recoverable from an insolvent builder.