Types of Building Contracts (Part 1)
By Kim Lovegrove RML, FAIB, Senior Lawyer, Lovegrove & Cotton
Cost Plus Contracts
A cost plus contract is a contract where the builder agrees to build for whatever the cost, is reimbursed either a fee or percentage over and above the final cost and with cost plus, the builder is paid every conceivable cost or expense that is incurred on the project. It includes costs of labour, costs of material, on and off site work related overheads, costs of hiring, power, water, an allowance for supervision etc.
Some Australian jurisdiction like Victoria impose restrictions on the use of cost plus contracts for domestic building work. Careful regard must be had to such regulations for fear of breaking the laws.
Architect Administered Contracts
Architect administered contracts are characterised by the following:
- The architect “steps into the shoes” of the client and administers the greater part of the client’s contractual obligations.
- The architect issues a certificate, say in respect of payment, the certificate can be tendered as evidence of progress being due and payable. From the builder’s perspective, the certificate is a fairly good guarantee that the amount certified must be paid. In fact some builders instruct their solicitors to issue winding-up notices on companies if a certified payment is not paid.
- As to the architect’s professional obligations, the architect can never collude with the client. The architect has a professional obligation to both the builder and the owner and is legally obliged to treat both parties professionally, fairly and objectively. If the client puts any pressure on an architect to under-certify, this will put both the owner and architect in a position of default and the builder can sue both the owner and architect.
Head contract is an expression used to define the contract that is signed between the builder and the principal/client/developer. The head contract could refer to a cost plus contract, architect administered contract or a lump sum contract.
Design and Construct Contracts (“D & C”)
Under “D&C” the builder is engaged to design and construct a project for the client.
The more comprehensive the brief given by the client to the builder, the less the design component. The vaguer the brief, the greater the design component.
“D & C” contracts are probably the most misunderstood contracts and many so called “D & C” contracts in the industry are not in fact so.
The advantage of using “D & C” is that it provides a single point of liaison and responsibility for all aspects of a project.
A typical “D & C” contract is one where the client gives the contractor an elementary brief. The contractor designs the project “from scratch”, secures all the relevant approvals and once building approvals have been granted, constructs the project as per the drawings and specifications.
One has to be cautious giving a fixed price to design and construct as it is very difficult to determine how long it will take to secure all of the building approvals. At the very least, the contract should be subject to cost adjustment.
The builder should also be loath to give a firm completion date for “D & C” as it will be nigh on impossible to calculate the date. For arguments sake, Council could take 18 months to approve the drawings.
Look out for next week’s Lovegrove & Cotton Bulletin for Part 2 of this piece.
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