Residential Building Contracts: Getting into the Nitty-Gritty

At face value, residential building contracts appear relatively simple; you sign a contract with the builder, pay the contract price over a series of staged progress payments, and in return, you receive a house constructed in accordance with the plans and specifications. However, this exchange is usually more complex than what meets the eye.

This article sets out common issues and key points we believe that clients should reflect on prior to signing a building contract.

Most contracts include mechanisms that allow the contract price to be increased. These mechanisms are within the contract, despite promises of “fixed prices”, and can lead to big surprises when the builder issues their payment claim. The provisions in question are frequently referred to as:

• Cost Fluctuations;
• Adjustments (including the addition of the builder's margin);
• Variations (whether requested by you or invoked by the builder under the contract);  
• Provisional Sums; and
• Prime Cost Sums.

To limit surprises down the track, you should read these provisions carefully, or seek legal advice. By varying the contract terms, the risk of unexpected price increases can be reduced.

For example, if there are specified materials that become unprocurable, then usually the builder may substitute other materials with another reasonably equivalent material. We anticipate you would want to approve any substitution of materials. If so, we recommend that those provisions be amended so that your approval is needed for any substituted materials.

All building contracts will be accompanied by building plans setting out aspects of the design and specifications listing what materials/products will be used in construction.

We recommend you ensure, as far as reasonably practical, that all plans and specifications at the very least:

• Set out in detail with an itemised list of what is included and/or what is excluded;
• Meet your expectations and exhibit what has been agreed to; and
• Incorporate any additional inclusions, requests, and variations (or at least communicated and agreed to in writing with the builder).

The key is to nail down as many of the specifics and make sure all elements are covered with adequate specificity before signing the contract. This will mitigate any subsequent disputes down the track.

You will need to pay a deposit which can range between 10% - 20% of the contract price, which usually becomes payable at the date you sign the building contract. How the deposit is managed will rest on the contract drafting and is an important provision to pay special attention to. For example:

• The deposit may be held by the builder until a triggering event (i.e. once the property reaches practical completion);
• The builder may not be required to hold the deposit and be entitled to utilise the funds in the initial stages of the build;
• A portion of the deposit may be non-refundable if the contract does not proceed after signing; or
• If you default under the contract, your deposit may be forfeited and put towards outstanding costs owed to the builder.

Understanding how your deposit is managed and guaranteeing your deposit is safeguarded during construction will protect you if the builder were to become insolvent or default under the building contract.  

For example, if you are entering into a building contract where the title to your property is not due to issue for some time, you run the risk of losing your deposit if the builder becomes insolvent before construction commences. We recommend the building contract be varied so the deposit is held by the builder’s lawyer and is not applied to payments until the title to your property has been issued.

Generally speaking, most building contracts are made up of staged payments and a final payment at the completion of construction. These payment claims are often issued as follows:

• Stage payments will be payable when the relevant stage (i.e., foundations, framing, roofing) has reached substantial completion; and
• Final staged payment will be payable once the dwelling has reached practical completion (although this may vary from contract to contract).

When receiving a staged or final payment claim, we recommend reviewing the invoice in detail and visiting the site or requesting the builder to provide photographic evidence the work has been completed or reached substantial completion before making payment.

Understanding when the final payment claim will fall due is an important aspect to understand, as this will limit any unnecessary delays, suspensions, or interest charges on unpaid funds.

A building contract will usually stipulate an expected start date and expected finish date for construction to reach practical completion. However, in most building contracts, there are extensive provisions that provide a wide range of instances where the completion date could easily be pushed out and you would have no recourse against the builder, for example: 

• Events beyond the reasonable control of the builder e.g., shortage of materials or staff, delay in delivery, or weather; and
• Delays caused by variations to the contract.

In some building contracts, if the builder fails to complete the build by the completion date, the builder may be required to pay you liquidated damages until the build is complete. Although be aware, it is unlikely this will be paid due to the various reasons the builder can extend the completed date as explained above.

Building Guarantees

To ensure that you are protected during construction and once the property is complete, you should ascertain whether the building contract offers a guarantee for the build. There are numerous guarantees offered on the market (such as Halo or Masterbuild).

These guarantees are invaluable to clients, and some of which provide the following benefits including:

• If a builder becomes insolvent during or after construction, as in most circumstances, the guarantee provider will step into the shoes of the builder to complete the build or remedy any major defects that have arisen within the guarantee period.
• When you decide to sell the property and have the ability to transfer the guarantee over to the purchaser.
• Assessing which building company to use, because if a building guarantee is not offered as part of the building contract, then it is a good indicator of the builder's proven track record/credibility in the industry.

However, each guarantee provider differs in what protections are afforded to consumers. Therefore, it is important to understand the limits of these guarantees and what they do not cover.

Building contracts come in all shapes and sizes which are not considered a “one size fits all”. They are predominantly on a standard form which has been produced by the building industry and they are mostly in favour of the builder. Therefore, taking extra care at the outset and seeking legal advice before signing is an important first step to make sure the terms of the building contract is suitable for you.

If you would like to discuss a building contract, please get in touch with our experienced construction law team on 03 441 2743 or at enquiries@toddandwalker.com.