The building contract process is vital to getting a good home residential contract. This article outlines explores the building process and combines helpful hints and industry insights with industry terms you will find invaluable.

A good relationship between client and builder requires each party to be clear on what the other expects. Some clients want minimal contact with their builder and are happy to turn up to see the finished job. Other clients want on-going updates on the work in progress and will visit the site regularly.

Generally speaking, only smaller builders can provide this ‘personalised service’, and clients building with large companies should not expect extra service despite the rhetoric from sales people. Clients should only expect to get what they contracted the builder to give them.

Clients who are keen to visit the site can be advantageous to the builder because any problems can be dealt with before they become major and expensive dramas. At the same time though, clients must understand that they cannot interfere, obstruct or direct trades people of site. All problems on site should be raised with the builder as he or she is the only one who can direct trades people.

A well-documented contract will help minimise the potential for disputes during the building process. Delays in construction often result in clients having to extend rental agreements and, at the same time, meet mortgage repayments. Standard building contracts allow an extension of time for the builder where there is a shortage of materials or labour, or when there is inclement weather. Liquidated damage clauses can be included in a building contract, compelling the builder to pay compensation (usually equivalent to the rental value of the property) if the building work takes longer than agreed. Many builders are reluctant to include such a clause.

Contact with your builder should only be during working hours and certainly not every day. If you build with a large building company then you are likely to be given a client liaison person as your contact, not the building supervisor.

This can be frustrating for clients since messages are not always relayed and supervisors do not always return calls.  You should keep in mind that supervisors may have 30 or more homes to manage and they only visit a site every second or third day depending on what work is being done. The level of supervision generally reflects the quality of workmanship on site. Large building companies have specialist staff such as salespeople, contract administrators, client liaison staff, drafts persons, estimators, schedulers, building supervisors, subcontractors, accountants and building managers. It may be difficult therefore to obtain quick responses to your concerns.

A client wanting to change something after construction has begun must request the variation to the builder in writing. A variation order requiring a change of plan needs directions to the drafting office to change the plan, the estimating office to price the changes, the scheduling office to order additional material, the supervisor to manage the change on site and the subcontractor to make the change.
It is no wonder that mistakes are made resulting in despondent clients. Small builders, on the other hand, may undertake each of these tasks themselves and reduce the chance of mistakes and misunderstanding.

The Contract
Your contract documentation must be very detailed and clear so as to minimise the possibility of misinterpretation by the builder. A kitchen sink, for example, should be described by giving the following information: make; model; number of bowls; left, right or twin drainers; one or three tap holes, strainer. In order to do this exercise thoroughly you need to have up-to-date knowledge of the products available.

Preliminary Work By The Builder Includes:

• Inspecting your land.
• Liaising the statutory authorities (e.g. Councils, titles office, and water authority).
• Preparing plans and specifications.
• Having a site survey done. This will include placement of corner pegs and drawing a contour plan of the site.
• Doing a title search.
• Arranging the provision of services (e.g. Water, power, sewerage, telephone and gas).
• Attending all necessary meetings with public authorities and with client.
• Establishing floor levels.
• Telephone and office time.
• Obtaining engineering details for retaining walls.

The preliminary Work Contract should itemise and cost all the preliminary work the builder is going to do. Application for a council building licence and for water authority approval should not be done as part of the preliminary work. It is crucial that you read that preliminary agreement carefully and make sure it does not commit you to signing the building contract.

Where the builder suggests it is too difficult to accurately predict the cost of preliminary work then you should ask that a maximum fee is shown. In this way you will limit you liability. If the actual costs are less than the maximum shown in the contract then you will be entitled to a refund.

If you do not proceed with the Building Contract then you are entitled to receive the results of the preliminary work including plans, site survey and engineer’s specifications. You will not, however, be able to use these plans without written consent from the builder since they are normally copyright. It cannot be stressed enough that you should never accept a verbal commitment from a salesperson or builder. It is the written work that counts.

Before the Building Contract is signed the client may request changes to the preliminary drawings. These changes will of course change the final price or the contract but will not incur a variation order fee. Each time a change is made the sales person will consult with an estimator to calculate price changes. If the change is minor the salesperson may deduct any extra cost from his or her commission and not charge the client extra. After the Building Contract is signed however, changes can only be made by raising a variation order.

Contract Details
A contract is legally binding agreement between two parties: the builder and the client. For a contract to be effective the client must be able to pay and the builder must be able to build. Each party needs to confirm the others credentials.

If work is carried out, e.g. house plans are drawn, and the client does not proceed to sign a Building Contract, then the builder cannot charge for that work unless a specific Preliminary Agreement has been signed by both parties. Under the Home Building Contracts Act of Western Australia (similar acts with similar names apply in each state), the builder may receive a maximum deposit of 6.5% if the contract is signed prior to the documents being prepared. In the case that the client decides to terminate the contract then the builder may claim for any services performed in relation to the contract.

There Are Two Basic Contract Types:

1. LUMP SUM BUILDING CONTRACT
As the name suggests, this is a fixed price contract and can only vary if:

• The client signs a Contract Variation Order.
• Provisional Sums are included.
• Government charges apply.
• Unforeseen circumstances arise (e.g. hard digging).

If the price increases by more than 5% of the original contract sum then the client may terminate the contract and pay the builder any costs incurred.

2. COST PLUS BUILDING CONTRACT
In cost plus contracts the cost of labour and materials is calculated and either a percentage or a specified sum is added to this as the builder’s supervisory fee. Prime cost and provisional sum amounts are excluded. If the builder’s fee is calculated as a percentage of the actual materials and labour component then there is the risk that the builder will not seek out the lowest prices since in doing so his fee will actually be lower. The Home Building Contracts Act only covers work done from site preparation onwards. It is therefore necessary to prepare a Preliminary Agreement in which the client gives the builder authority to prepare plans, price the job and have a site survey done.\

ALL CONTRACTS MUST:

• Be in writing
• Set out all the details of the work to be done
• Show a contract date
• Be signed by both parties or someone appointed by them

The owner must be provided with a short explanation or the duties of the builder and the owner before the contract is signed. The builder is responsible for the contract to be appropriately signed and dated, showing contract price, Site location etc. The builder is also responsible for providing the owner with a copy of the contract before the commencement of work. The builder must have acknowledgement of receipt of the contract by the owner.

During the course of the works the owner may make variations to the contract. The builder may, if practicable, agree to make the required changes. The builder will, of course, request the change in writing and calculate the extra cost of such a change.

The cost will include the actual cost of materials and/or labour plus a builder’s mark up. A variation order (VO) fee is also charged to cover administrative costs. Some builders have high VO fees to deter clients from making changes, which often result in on-site delays and problems with subcontractors. A client requesting an omission of certain work from the contract is still likely to pay a VO fee since the builder will have to cancel orders and adjust paperwork. Similarly, a builder may raise a variation to the contract.

REASONS FOR A BUILDER RAISING A VARIATION ORDER INCLUDE:

1. Specific directions from the local council’s building surveyor, e.g. Shire requirements for non-reflective roofing iron, exhaust fan in internal toilets, retaining walls, crossovers.
2. Government departments imposing taxes or charges (e.g. water authority). The builder can claim any increased government fees or taxes from the client.
3. Unforeseen circumstances (e.g. hard digging when rock or tree roots are found on site or specific building materials become unavailable and must be replaced with more expensive alternatives.
4. Extension of completion time because of wet weather or labour shortages.

When the builder raises a variation he must present written reasons and costs to the owner within 14 days for their approval.

A CONTRACT IS CONDITIONAL ON:

• A Building license is being granted by the council within 45 days or the contract date.
• The relevant water authority giving their approval.
• The builder and owner accepting any conditions attached to the licence by the council.

Practical Completion means that the building is fit to use for its intended purpose. That is, its windows and doors are secure and cannot be opened from the outside, power is available, plumbing is functional, kitchen appliances operate, the hot water unit is working and the site is clean of all debris and rubble.

Practical Completion means that the building is fit to use for its intended purpose. That is, its windows and doors are secure and cannot be opened from the outside, power is available, plumbing is functional, kitchen appliances operate, the hot water unit is working and the site is clean of all debris and rubble.

MANY PEOPLE CONFUSE PRIME COSTS AND PROVISIONAL SUM:

Prime Cost (PC) is the retail price of goods. It does not include the cost of installing the goods. Prime Cost sums are used for items such as ceramic tiles, cook tops, ovens and hot water units. The contract will state how much you can spend on these items.  If you nominate a cook top that exceeds the value your contract shows then you will have to pay the difference.

Provisional Sum (PS) is the amount of money allocated to supply and install certain goods and services that the builder cannot accurately determine the cost of (e.g. site works and retaining walls). It is best to avoid provisional sums and to ask the builder to include these in the contract if at all possible.

It is the builder’s responsibility not to underestimate PC items and they should be no less than the least amount it could reasonably cost to purchase the item. PS items should not exceed the builders estimate by more than 10% unless extraordinary circumstances arise (e.g. the site works unearth a car body from the building site).

The contract prohibits a ‘Rise and fall’ clause. That is, changes in the cost of labour or materials cannot be a reason for changing the contract price.

BEFORE COMMENCING ANY WORK, THE BUILDER WILL REQUIRE THE OWNER TO PROVE:

1. Ownership of land to be built on (copy of title deeds).
2. Ability to pay the contract sum (usually a lending authority approval). Ability to pay may also be requested prior to work being done on major variation orders.  A builder must have indemnity insurance prior to performing any work. The client should check the policy and make sure that it paid up and current.

AN INDEMNITY INSURANCE POLICY MUST:

Cover the cost of building work or $1,000,000 whichever is greater.
Allow claims up to 6 years from practical completion.
Insure against risk of loss from non-completion of the building due to the death of the builder, insolvency of the builder or if the builder can not be found.

Any inclusions in a contract that restrict any provisions of the Home Building Contracts Act are considered void by the act. For example, if the builder included a clause to exclude him from home indemnity insurance it would be void.

A notice to the Home Owner must be provided to the owner before contract signing. It outlines the obligations of both the owner and the builder.

THE BUILDING CONTRACT WILL REFER TO:

1. DRAWINGS
Including house plan (elevations, top view, detail layout drawings of kitchen, bathrooms and laundry), site plan (showing location of the house relative to the block of land), electrical and plumbing plans.

2. AN ADDENDA
or written description of work and materials to be used, PC allowances for items to be selected by the owner and a description of the work included under provisional sums.

3. STANDARD SPECIFICATIONS
Showing the materials to be used and the quality or finish of work to be done.

4. A COLOUR SCHEDULE
Showing brick and mortar colour, type of joints, door furniture, pan and cistern type and colour, etc. There will also be a section for ceramic tiles and laminate colours which will be completed at a tile supplier and forwarded to the builder.

5. FINANCIAL ARRANGEMENTS
Including a statement showing financial approval from the lending authority and timing of progress payments.

6. A COPYOF THE LAND TITLE
And confirmation that the land transfer has been completed. Restrictive covenants and easements will be stipulated in the title.

7. THE COUNCIL BUILDING LICENCE AND WATER AUTHORITY APPROVAL
Which must be obtained before construction commences.

8. LAND DEVELOPERS CONDITIONS
Listing materials to be used, building standards, etc.

Contractual Points of Interest
Always make sure you get the builder to sign all contract documents just as he asks you to sign them. A builder always get the client to sign any variation order before he will action them. You should insist the builder returns you a copy of the variation order with his signature on it. This is important because if the builder mistakenly fails to action a VO he may contact having received your signed CO in the first place and you will not have any proof to show otherwise.

The builder is responsible for all aspects of construction and cannot off-load his responsibilities by having a client sign a VO to absolve them. The builder must meet all Australian Standards in the construction and cannot downgrade these even with the owner’s written approval. For example, the builder must make good any council footpaths damaged during construction even If the owner has signed a VO to absolve him of repairs.

Power and water used on site is payable by the client unless the contract states otherwise.
The builder is responsible for making sure that all materials and goods used in the construction are suitable for the intended purpose. For example, a hot water unit that is inadequate to supply hot water to all hot water taps even is the client has requested it, would have to be replaced by the builder with a suitable model if the issue was brought to the Building Disputes Committee.

Site access for the owner should be within working hours and should not impede the progress of work on site. If the owners wish to authorise another person to inspect the site they should inform the builder in writing. Lending authorities must be given access when required. It is not sufficient to make changes to a plan for other contract document and sign and return it to the builder. The client must make the requested change in writing and have a VO raised. What may seem a simple change to a client may become a major problem.

As an example, halfway through construction a client relocated the septic tanks at the rear of his block on a signed plan and forwarded it to the builder. The septic tanks were installed by the owner’s plumber at the levels indicated on the plan after the house was completed. At this stage it was discovered that there was insufficient fall from the house to the septics. If the increased distance to the septics had been noted at the beginning of the job then the finished level of the tanks could have been adjusted to accommodate. Consequently, the owner incurred considerable expense to lower the tanks.

The supply of some goods by the owner can cause problems when the tradesperson turns up to install them and the goods have not arrived. The delivery of materials to site can be particularly difficult after the house had been locked up and the owners or their delivery driver do not have access.

The builders insurance will not cover your goods unless you have made specific arrangements.
Compatibility of goods can be a problem (e.g. range-hoods that do not fit flues). Air-conditioners or pumps requiring special wiring that the builder was not alerted to. The store you purchased goods from inadvertently sells them all without holding yours. The new model may have a different cut out size which does not fit the cabinets already made.

Owner supplied goods are best avoided but if you must, it is wise to give them to the builder from the start if he is prepared to store them. An owner-supplied hot water unit (HWU) can be a problem if the incorrect size pipe work is installed by the plumber. Low pressure units require smaller diameter pipes. The HWU should be nominated from the outset.

Some builders give extended structural warranty periods. If your builder offers one then obtain a copy and keep it in a safe place. Standard Housing Industry Association contracts give a 6-year structural warranty. When extended structural warranties are given the builder will likely be including stronger footings and slab in the building. The higher price for an extended warranty in these cases may be very worthwhile in the long term.

Fully describe all materials and finishes you expect to be used. For example ‘cedar look gables’ is not a sufficient description. It should read ‘hardiplank, wood grain with two-tone paint, base colour; brown (code no.) brushed, top colour; cream (code no.) sponged’. Being familiar with product names and terminology is important in getting the details correct. A lay person might describe a roof as ‘tin, blue colour’; a builder will describe it as ‘custom orb, colorbond, mountain blue colour’.

All information in the contract must be clear and specific. It should not read:

‘Add pergola’; but
‘Add one hardwood timber (or treated softwood0) 3m x 4m long pergola with 6 posts (100 x 100mm), 100 x 45mm rafters at 600 centres and battens 50 x 35mm at 200 centres. Pergolas are to be attached to main structure at eaves level with concealed rafter brackets. All posts to be clear of finished ground level and set on galvanised steel stirrups. Where butt-joins are included then proprietary, galvanised brackets are to be used with galvanised nails. All timber is to be primed and painted. Posts to be of dressed timber with bevelled edges. Knots in timber are not acceptable or knots to be filled prior to painting.’

If an issue looks like escalating into a dispute between you and the builder make sure you keep all correspondence on the matter and record dates and events as they occur. Photographic evidence is also very useful. In the event that the issue cannot be resolved then you can apply to the Building Disputes Committee (BDC) of the Builders Registration Board for a verdict. The Committee will act using the Australian Standards as the basis for their decisions on workmanship and suitable materials.

The Home Building Contracts Act says that if an owner does not make a formal complaint to the BDC within 6 years of completion about a structural problem such as a major wall crack, and complaints to the builder result in him patching the problem, then the owner has no recourse to have the matter investigated by the BDC. If, however, the owner lodges a complaint prior to the 6 years then the BDC will not only ask the builder to rectify the problem but may also extend the warranty period.

Before signing a building contract ask to see the builder’s indemnity insurance and check that it is current. If the building is close to a water authority sewer line then you are likely to need concrete piles to support the footings under that part of the building which is close to the sewer line. This will be an expensive exercise and it may be best to move the building or change its shape.

The water authority can vary the location of a water meter by up to one metre at very little cost but any more and it may cost hundreds of dollars. If it needs to be moved and the builder had not alerted you to this problem prior to contract signing then the builder should have to pay to have the meter located as per the drawings.

The council health officer will need to inspect the septic system prior to its being covered over. The plumber will arrange for this to happen. Problems arise when the builder’s plumber is commissioned to do all plumbing work except install the septic tanks. The owners, believing they can get this work done more cheaply by another contractor, find that neither their nor the builders plumber have been commissioned to do the connection between the two sections of work or the testing of the system. It
is best to leave the task to one plumber.

Some builders or their sales representatives will include an amount of money for carpets or curtains in the contract which they note down as ‘to be credited back at final account’. This enables the client to effectively borrow this extra amount of money from their lending institution. The money is given to them, via the builder, to spend on whatever they want. This practice is not recommended.

Commissioning a building consultant to inspect and report on work at various stages of construction is money well spent. Their written report can be given to the builder so that any defects can be rectified. Remember to advice the builder that the consultant will be attending the site on your behalf.

If you building site is within 3km of the coast then coastal conditions will apply. The builder should consider including the following:

• Hot-dip galvanised or stainless steel balustrades.
• Mortar upgrade so that it doesn’t fret.
• Plastic or stainless steel wall ties.
• Colour bond gutters and down pipes.
• High wind rated window frames and glass.
• Securing or every roof tile.
• Sisalation under roof tiles to stop wind-blown rain from entering.
• Hot-dip galvanised external steel lintels and all other exposed structural steel.

Builders are often wary of giving clients any house keys with which to gain access to do finishing work such as flooring or internal painting. The reason for this is because the front door lock operates on the builder’s construction key which he gives to all his trades people. Once the lock is opened with the owner’s key then the construction key will no longer operate, thus creating an inconvenience.
Added to this is the risk of a disgruntled client taking possession of the house against the builder’s wishes. Taking occupancy before time is not wise since this effectively confirms practical completion, and while the builder is not required to finish any outstanding work for between 3 and 6 months (the defects liability period) the owner is required to pay the final account less any retention money.

Some builders will offer the client a sliding door key which must be returned to the builder once the client completes a specific work. To reduce the potential for disputes it is best to wait for formal hand-over to occur before moving in to do the finishing touches.

• Provisional sums for items that cannot be accurately costed may include:
• Earthworks (including tree and rock removal).
• Power supply.
• Water run-in.
• Sewer run.
• Concrete piling.
• Legal fees for strata titles.
• Drainage of waterlogged sites.
• Concrete pumps for steeply sloping sites.
• Kerb or footpath deposit (refundable from the council).
• Hard digging (e.g. where rock or previously buried rubble is encountered).
• Trafficable lids to water meter or sewer junction.
• Retaining walls.
• Access track for deliver vehicles.
• Manual site-clean for sites with no bobcat access to the rear.
• Soak wells and cut-off drains to sloping driveways.
• Storm-water connection to the nearest silt pit.
• Protection of power lines which are in close proximity to the building.

Each building site will pose its own particular concerns and the builder will want to minimise his exposure to cost blow-outs. His experience will be invaluable in anticipating potential problems and advising you of the best course of action. Clear and concise contractual documentation is essential at all times.

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