What to Watch For? A Builder’s Guide to HIA Building Contracts
By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers
The major provisions of the building contract will be on song with the Domestic Building Contracts Act (DBCA), especially in relation to Variations, Extensions of Time and progress payments.
Should a contract dispute ever find its ways to VCAT, it can be the strength of a builder’s paperwork as much as the quality of their building, that will strengthen the builder’s case.
A potential pitfall for builders, can be getting paid for variations. (Domestic Building Contracts Act 1995, section 38)
Variations by Owner:
The owner must give a notice.
The builder may carry out work if the variation does not require a change to any permit, will not cause delay or increase the price by more than 2%.
Otherwise the builder provides a written notice.
The owner must then give another notice authorising the variation.
The builder cannot claim for a variation otherwise than by section 38.
Unless there are exceptional circumstances or hardship would be suffered by the builder
And it would not be unfair on the owner for the builder to be paid.
This is reflected in the HIA New Homes Contract, where there is a 3 pronged ‘paper trail’ process.
Under clause 23 the request from either the owner or the builder must be in writing setting out details of the variation and reasons for it;
If it is an owner request and the builder reasonably considers it will not delay the works, increase the Contract Price by more than 2% or won’t require a variation to any permit, the builder may carry out the variation; or
(iii) The builder must provide a written notice stating what the effect will be on the Contract Price and the estimate of any extra time needed – or alternatively give another notice saying the builder refuses or is unable to carry out the variation and the reasons therefore;
(iv) The builder should not carry out the variation unless
(ii) applies, or the owner gives a further signed notice attached to a copy of the builder’s notice providing the particulars (described at (iii) above).
What do you do if owners refuse to pay for variations?
Ensure that all variations are properly documented before work begins.
Section 37 for builder variations. Section 38 for owner variations.
Many owners will argue that they do not have to pay for variations as they are due to builder mistakes.
Or the builder went off on a tangent.
This tactic is much easier if there is not a sufficient paper trail.
If the variation is documented and approved in writing the builder will be entitled to the increase in costs and time (section 39). If the work is done but no payment is made, then the parties will be in dispute under the Contract.
The builder cannot ask for payments in advance.
This is illegal, see section 40 of the Domestic Building Contracts Act.
Section 40: The builder can only recover the percentage of the contract price as it relates to the stages of the works.
Or the payment must relate to the progress of the building work.
It is an offence to demand payment outside these terms.
Penalty 50 units ($5,000).
Unless the parties contract outside section 40 by completing a form attached to the contract.
The form must be as approved in the Domestic Building Regulations.
In the HIA Contract, the builder and owner can agree to use Method 1 for progress payments, ie where the payment claim is made when each stage is completed. There are definitions for Base stage, Frame stage, Lock- Up stage, Fixing stage, and ‘Completion’.
In this scenario, the Method 1 table at page 11 needs to be filled out by the builder, with the percentages assigned to each stage. (Refer to Method 1 in Schedule 3).
Alternatively, the parties can agree to depart from the requirements of s 40 of the DBCA by adopting Method 2. If this method is used, the builder can claim progress payments as set out in the table, rather than strictly in accordance with the building stages.
However, when using Method 2, the owner must read and sign page 13 which contains the warning to the owner about the “change of legal rights”, ie by agreeing to different progress payments than set out in the DBCA.
Extension of time requests (clause 34 of HIA New Homes Contract) The builder is entitled to claim extensions of time for a range of reasons outside the builder’s control. A written notice must be served on the owner informing them of the extension of time (EOT), stating the cause and extent of delay.
The possible reasons include:
- a variation or a request for a variation by the owner;
- a suspension of work pursuant to clause 35;
- inclement weather in excess of the days nominated in the Schedule;
- industrial action affecting the work of suppliers or trades;
- anything done or not done by the owner or their agents;
and a useful catch-all:
(a) any other cause that is beyond the Builder’s direct control.
If the owner does not respond within the time frame, the extension may be deemed given, because clause
34.3 says: to dispute the extension of time, the owner must give a written notice with reasons why the owner disputes the claim – within 7 days.
EOT requests are important to protect the Builder from liquidated damages claimed by the owner in the final payment.
If the delay arises from anything done or not done by the owner or the owner’s agents or employees, the builder may also be able to claim delay damages (claimable in the next progress payment).
If the owner rejects the claim, the Builder may still be entitled to a reasonable extension, but it may form the basis of a later VCAT dispute or conciliation.
Notice of Suspension
This must be used with care. Proper grounds must be used within the contract. A written notice needs to be prepared, signed/dated and served on the owner.
HIA – New Homes Contract
The grounds for suspension are specified in clause 35. Includes:
the owner failing to make a progress payment within 7 days after it becomes due
the owner is in breach of the Contract, including for example failure to provide evidence of capacity to pay or access to the land, directing trades on site, or going into early possession of the Works.
Ideally you should seek legal advice before preparing a notice of suspension. The notice needs to be served by registered post and the owner must remedy the breach within 7 days after receiving the notice.
If works later recommence the builder is entitled to an automatic extension of time for the period of the suspension.