Understanding Contracts
When is a building contract required?
By law, all building projects valued greater than $5,000.00 (inclusive of GST) are required to have a written contract in place prior to commencement of any works. If the contract value exceeds $20,000.00, cover from the HBCF (home building compensation fund) previously known as “Home warranty insurance” needs to be in place prior to any form of deposit being paid to the contractor.
Any homeowner seeking to engage a builder should undertake their due diligence prior to entering into a contract. All the relevant information can be found on the NSW fair trading website. https://www.fairtrading.nsw.gov.au
Contract Types
There are 2 commonly used structures for contracts used in the residential building industry; Fixed and Cost-plus.
FIXED PRICE contracts, sometimes called “lump sum” contracts, are when the builder has access to all the relevant information for the build i.e. plans, approvals, engineering and can prepare a fixed price proposal.
Pros
- Simplicity and transparency for both parties.
- Structured payment schedule broken into predetermined stages.
- The risk lays in the builders’ hands and the owner is protected from budget blowouts.
- Banks prefer this structure so it’s much easier to access finance approval.
- Often an accurate timeline can be determined prior to starting.
Cons
- Builder needs to undertake a detailed quoting process to ensure all items have been accounted for in the scope and pricing is accurate.
- Longer time frame to prepare proposal.
COST-PLUS
The alternative to a fixed price is COST-PLUS contracts. Throughout the duration of the build the costs of services, labour and materials are tracked and provided to the owner. The building contractor then calculates the total of these costs, applies a percentage/markup to the total and invoices the costs a regular interval throughout the build, usually a weekly, fortnightly, or monthly.
Pros
- Useful in emergency or urgent situations
- Short turnaround in preparation and commencement
- Can be beneficial when used for complex builds where some exact costs cannot be determined
- Transparency in costs
Cons
- Overall cost unknown and open ended.
- Owner can be at risk of budget blowouts.
- Tracking cost and preparing and reviewing invoices can be time intensive for both parties.
- No incentive for the builder to reach project completion which can result in a longer timeframe.
What are unforeseen works?
Unwanted budget surprises are far less likely when building from scratch, however when undertaking works to an existing home there is always the chance that unforeseen works outside the quoted scope could arise. Generally, the older the home is, the likelihood increases.
Some common occurrences are;
- Asbestos.
- Mold.
- Uncovering buried waste, decommissioned septic tanks and rising water during excavation.
- Structural issues.
- Leaks; roofs, plumbing, shower recesses.
- Electrical issues.
- Termite damage.
It’s advised that when planning for a home renovation or addition, owners be prepared and have a contingency in place to cover any unforeseen works should they arise.
What are the key elements of a building contract?
What are the key elements of a building contract?
Parties: Clearly identify who the contract is between, including the names and contact information of all parties involved.
Purpose: Clearly state the purpose or objective of the contract.
Terms and conditions/clauses: Detailed clauses define the terms and conditions of the contract, including what each party is agreeing to do, timelines for performance, payment terms, and any other relevant details.
Inclusions & exclusion: Clearly define any specific inclusions and exclusions to the tendered scope of works.
Confidentiality and privacy: If applicable, include provisions to protect the confidentiality or privacy of any sensitive information that may be exchanged during the contract.
Termination: Define the circumstances under which the contract can be terminated, and the process for doing so.
Dispute resolution: Include provisions for resolving any disputes that may arise during the contract, such as mediation or arbitration.
Governing law: Specify the governing law that will apply to the contract.
Signatures: Finally, ensure that all parties sign the contract, indicating their agreement to the terms and conditions outlined in the document.
What are allowances?
There are two common types of allowances used in building contracts, Prime Cost (P.C.) and Provisional Sum (P.S.).
A prime cost item refers to a specific amount of money that is set aside in the contract to cover the cost of a particular item, such as fixtures, fittings, or appliances. The actual cost of the item is not known at the time of the contract signing, so an allowance is included until the item is selected and actual cost known.
On the other hand, a provisional sum item refers to a specific amount of money that is set aside in the contract to cover the cost of an item or work. This is usually because the works have not yet been fully specified or its not possible to determine the actual cost. The provisional sum is intended to cover the expected cost of the work, but if the actual cost doesn’t align with the allowance, the difference between the two is applied to the overall build cost.
It is important to note that both prime cost and provisional sum items should be clearly defined and specified in the building contract to avoid any confusion or disputes. The contract should clearly state the amount of the allowance and the items or work to which it applies.
If you’re searching for a professional building company to start your building journey get in touch with us via our website https://www.beachbreezebuilding.com.au/