Know What You’re Getting In To: Types of Building Contracts
Written by Jennifer Barry, Solicitor, Lovegrove Solicitors
When you engage a builder to conduct building work on your property, it is easy to assume that building contracts only come in one form. However, this isn’t the case and, although there is a standard form contract, there are other types of building contracts and forms of contractual relationship which you may encounter. Each of these have different requirements and potential pitfalls which you need to be aware of.
The most common form of building contract is the standard “industry approved” contract, which is governed by rules set out in the Domestic Building Contracts Act 1995. These contracts are often produced by industry associations, such as the Master Builders Association, Housing Industry Association (HIA) and Australia Building Industry Contracts.
While these contracts contain standard terms which comply with the Act, there is room for negotiation between the parties. The contracts contain space for the parties to insert information such as the price, contract completion date, any excluded work, outlining builder’s margin on variations and other similar terms.
It is likely that you may encounter one of these standard contracts. It is important to note that although there is provision for the parties to adapt certain terms in the contract, it is essential that legal advice is sought before doing so as the contract must comply with the relevant legislation and changes may have unseen legal consequences.
Fixed-price contracts are contracts where the price under the contract is a fixed lump sum. This is the most common type of contract used for domestic building works as, except for certain situations, all domestic building contracts must be fixed-price.
However, despite this, it is important to be aware that there are several ways in which the contract price can be changed. This includes ‘variations’, i.e. changes or additions to the scope of works. It also includes prime cost or provisional sum adjustments. Prime cost items are those where the builder is unable to give a definite price at the time the contract is signed, despite making reasonable enquires, and include items such as tiling and landscaping. A provisional sum item is one which has not been decided at the time the contract is entered into, such as whitegoods and light fittings. In both cases, an allowance will be made for the cost of the prime cost or provisional sum item under the contract. If the amount allowed is more than the cost of the item, then the owner will receive a credit. If the amount allowed is less than the cost then the builder can charge a margin on the cost exceeding the allowance and this margin must be stated in the contract.
It is also possible that the one fixed-price contract may not cover all of the work that is to be done. For example, you may wish to have a separate contract for any landscaping work that may be conducted.
Cost Plus Contract
An alternative to the fixed-price contract is a ‘cost plus’ contract. It is essential to note that you should carefully consider these contracts before entering into them and seek independent legal advice as there is no upper limit for the final price and therefore these contracts have the capacity to become very expensive!
These contracts differ from the fixed-price contracts as, rather than agreeing to a fixed-price for the building works, the owner agrees to cover the builder’s costs plus an agreed margin for any overheads and profit encountered by the builder. In other words, the price is the actual cost of the works plus the builder’s margin.
These can only be used for domestic building work in set circumstances. The first is where the estimated cost of the complete work will be $500,000.00 or more. The second is where the full extent of the work to be conducted cannot be estimated until work has commenced, for example where it involves alterations or extensions to existing buildings. However, care should be taken when relying on this criteria as there is uncertainty as to the requirements for it to apply.
It is essential to obtain legal advice if you are considering using a cost-plus contract as they are prohibited except in the above circumstances and the penalties for use of these contracts outside those situations are severe. The Builder is under a duty to provide a fair and reasonable estimate of the total final cost at the outset of the works.
The final option is to have a domestic building contract drafted specifically for your use, which is referred to as a ‘bespoke’ option. A related option is to amend an existing standard contract to suit your particular needs. This can be done by drafting special conditions that override the general conditions.
Of course, if you are considering going down the bespoke contract path, it is essential to seek legal advice from a specialised construction lawyer to make sure it is compliant with all requirements under the Act.
By Jennifer Barry of Lovegrove Solicitors
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© Lovegrove Smith & Cotton 2014