Types of  Building Contracts (Part 2)

Types of Building Contracts (Part 2)

8 Aug 2017

By Kim Lovegrove RML, FAIB, Senior Lawyer, Lovegrove & Cotton.

Construction Management Contracts

Under construction management, the client engages a construction manager to administer the contracts and tradespeople on his or her behalf. Construction Management Contracts are more common in the commercial or civil building works setting than the domestic building works setting, because in the case of the latter context, it is very difficult to draft them in a manner that can guarantee compliance with the best domestic building legislation.

The construction manager coordinates and manages the building site and as agent for the client, pays the trade contractors.

The client contracts directly with all of the trade contractors and the construction manager. The proprietor is contractually obliged to pay the trade contractors and the construction manager. The construction manager as agent for the proprietor is not liable for payment of the trade contractors.

Unlike construction management, with typical lump sum building contracts, the proprietor contracts with the builder (and vice versa) and the builder contracts with the sub-contractors (and vice versa).


Lump Sum Contracts

A lump sum contract dictates that the builder must carry out the work for an amount that is agreed upon by the parties before executing the contract. Domestic building contracts by law must be fixed-price or lump-sum contracts.

There are two kinds of lump sum contracts namely:

  • Fixed Price Contract
    This type of contract has no facility for Rise and Fall or cost adjustment.

The second type is:

  • A Lump Sum Contract, subject to “Rise and Fall”
    This type of contract is subject to Rise and Fall or cost adjustment.A lump sum or stipulated sum contract is a totally different creature to a cost plus contract.Provided there is a well defined scope of work, the total price should only vary if there are changes to the scopes of work due to unforeseen circumstances. Contracts that are subject to rise and fall, contravene domestic building regulations such as the Home Building Act NSW and the Domestic Building Contracts Act Victoria.


Trade Contracts

Trade contracting is not sub-contracting. A sub-contractor contracts with the builder. A trade contractor contracts directly with the proprietor.

Trade contracts are used for construction management. Under a trade contract, the proprietor is contractually obligated to pay the trade contractor. If the trade contractor commits a default, the trade contractor is liable to the client, not the construction manager.

Sometimes builders confuse construction management with conventional building contracts, as do sub-contractors and trade contractors. It is important for the builder to explain the differences between construction management and conventional building contracts to tradesmen. Frequently, trade contractors are signed up on contracts under a misapprehension that the builder is liable for their payment when in fact the builder is not.


A sub-contract is a contract where the contracting parties are the sub-contractor and the builder.

Subcontracting is more common than trade contracting or construction management. With sub-contracting the builder is contractually obligated to pay the sub-contractor and the sub-contractor is contractually obligated to carry out work for the builder in accordance with the terms of contract.

There is no contractual privity between the sub-contractor and the builder’s client, i.e. the proprietor.


Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Council, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy.

If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.