It’s been a while since our last newsletter. Unfortunately, the challenges of running a small business get in the way from time to time. In this case, the government’s insistence that we adopt an institutional grade system to check that our clients aren’t terrorists has consumed significant time and resources.
In this newsletter I want to cover some key issues that we are seeing in the domestic building contracts that we review. It seems that many builders aren’t content with the pro-builder contracts prepared by the HIA and the MBA…
As usual, we will end the newsletter with the lighter side – a piece of nonsense from the legal world.
Building Commencement Date
In theory, the commencement date under a standard domestic building contract should be quite simple – 21 days after you provide evidence of funds, ownership and permits.
However, it isn’t that simple.
Firstly, the standard domestic building contracts specify that even if the builder is supposed to start within 21 days – the commencement date is actually the date the builder starts work.
Secondly, even this may not be right – as some special conditions provide that the commencement date is once the footings are dug or some other trigger.
Bottom line – failing to tie down the commencement date can mean that your build completion is delayed by months – and you have no right to compensation.
New Contract
It is common for the registration of subdivisions of new estates to be delayed. This means that the owner doesn’t get the title until some time after the building contract is signed and hence the building commencement is delayed.
Frustrated by these delays in an environment of rising costs – some builders have started to insert special conditions in building contracts that if commencement is delayed beyond a specified period – then the builder can terminate the contract on the basis that the owner is required to sign a new contract at a (higher) price that the builder considers adequately compensates them for the delay. As drafted, these clauses usually don’t give the owner the right to refuse.
It is hard to understand how the builder considers this fair or reasonable.
The resulting risks to the owner are considerable as they may not be able to afford the higher price or their bank may not agree to a loan based on the new contract.
Progress Payments
Below is a standard schedule of progress claims:
| Type of Contract | Percentage of Contract Price | Stage |
| Contract to build all stages | 10% 15% 35% 25% | Base Stage Frame Stage Lock-up stage Fixing Stage |
The above percentages add to 85%. This allows for a 5% deposit and a 10% completion payment.
Bear in mind that this is relatively generous to builders as a starting point.
However, most builders don’t agree – and seek to accelerate the cash they receive in two ways:
- By increasing the earlier stage payments and reducing the later payments; and
- By excluding works that are usually part of a stage from that stage. For example excluding sinks and benchtops from the fixing stage.
This raises at least three concerns:
- Ideally, you as owner want the builder to have a meaningful incentive to complete the build – if the completion payment is reduced and the builder has already received their profits – their incentive is correspondingly reduced;
- In an environment of rising building costs – this can lead to scenarios where the cost to complete the build exceeds the remaining payments. This increases the risk that the builder won’t complete the build; and
- Your bank may not agree to the accelerated payment structure.
Independent Building Inspectors
The laws of Victoria was recently changed to provide that you, as owner, are supposed to appoint the inspector that certifies that the various building stages are properly completed before triggering stage payments. This change was the result of a view that the inspectors, being appointed by the builders, weren’t sufficiently independent.
Most clients don’t know any inspectors and most builders are very keen to use their own preferred inspectors.
This leads to most clients adopting their builder’s suggested inspector.
However, some builders take it further to discourage the appointment of independent inspectors:
- A week extension to the building period for each inspection;
- A significant fee payable to the builder for each inspection; and / or
- A stipulation that the builder will pay for their preferred inspector – but if the client selects one then the cost will be paid by the client.
It seems I am alone in thinking that it’s reasonable for an owner spending hundreds of thousands of dollars on a build to want independent confirmation of build quality.
Building Contract Reviews
At Lewis O’Brien & Associates we remain committed to ensuring that clients understand their building contracts and get independent advice on building contracts and the increasing number of special conditions that builders typically insert. As building contracts usually involve large sums of money and affect your major asset – we believe and independent review is essential.
For $825 (inc GST) plus minimal disbursements (for standard domestic building contracts) you will get:
- A formal written review including discussion of key issues that most owner’s aren’t aware of, commentary on special conditions inserted by the builder and suggested special conditions you should insert to restore some sense of fairness to the contract; and
- A follow up zoom or phone call with me personally to answer any question you may have in relation to the contract, our review and / or the special conditions we have suggested.
You can contact us by clicking HERE to start the process.
The Most Ridiculous Thing
Any politician that claims to be keen to reduce house prices just isn’t serious. Developers tell me that the cost of government taxes, charges and fees on any new housing lot is $100,000 plus. The cost of new regulations / building standards imposed on new builds is costing $50-100,000 per home.
I wonder if the proud owners of these new homes see $200,000 of increased value as a result of all the government’s wonderful work?
Lewis O’Brien
Your Preferred Property Lawyer