Risky Territory: Taking Over the Guard from an Earlier Builder
By Justin Cotton, Director, Lovegrove & Cotton.
That earlier builder was the original contracting party with an owner. They may have been terminated for breach, or simply walked off the job.
Or if they have done one of three things, that is died, disappeared or become insolvent, then following a claim on the domestic building insurance (previously known as builder warranty insurance), the Insurer will get 2 builders to quote on an assessed scope of works.
That scope of works will be to rectify and complete the works of the original builder. The owner is entitled to make a claim for up to 6 years post completion for structural defects, and for 2 years for ‘non-structural’. Also, they can claim for incomplete works up to 20% of the value of the adjusted contract price.
Quotes received will generally be higher than the balance left in the building contract, because the quoting panel builders are covering themselves for the risk of taking over the warranties to the owners contained in section 8 of the Domestic Building Contracts Act 1993.
It can be a real hornets nest if owners end up in VCAT disputes with a second contracting builder. The quagmire is identifying genuine defects for which the second builder is liable (on the one hand) from variations or defects of the first builder on the other.
The writer was involved in one such VCAT dispute recently. The case ran for most of 2012, only settling just prior to Xmas without requiring a final hearing.
- Tardiness in carrying out the works (likely due to cash flow);
- Defective work in regard to structural matters including frame.
The second builder argued with some justification that he could not envisage the true cost of the work when he first inspected the partially completed project, because some of the defects were only apparent when his works had commenced.
Before too long he had sent the developer a detailed letter that set out a string of variations that would be required to the agreed price, due to extra works rectifying framing matters.
There was also evidence of emails between the second builder and developer where the defective works of the first builder were discussed, and the need for variations.
When the relationship soured several months later, the developer tried to argue he had not been properly advised about extra work, denied liability for the variations, and even claimed the second builder was responsible for the defects.
While we were able to argue certain key facts, it would have been better if the builder had followed the correct procedure in the industry standard contract and the Domestic Building Contracts Act 1993 (“the DBCA”).
That is, an initial notice setting out the extra price and time associated with the variation, and then a signed notice from the Owner agreeing to have the variation work proceed.
- Under section 37(3) of the DBCA the builder can still recover payment from an owner for a variation even if the builder has not complied with the ‘paper trail’ requirement;
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To do that the builder would need to show:
- The variation is made necessary by circumstances that could not have been reasonably foreseen by the builder at the time the contract was signed; or
- There are exceptional circumstances or that the builder would suffer a significant or exceptional hardship by not being paid; and
- It would not be unfair to the owner for the builder to be paid.
Furthermore, the builder argued that the correspondence between the parties near the start of the second contract showed that the owner had been notified about the defects and the need for variations.
In the case of the builder, he had seen an opportunity for a profitable project in taking over an earlier builder’s work. And it is generally accepted that a second builder will add a premium to the quoted price to cover the risk and uncertainty of:
- Taking over an earlier builder’s work; and
- Thereby taking responsibility for fixing earlier defects in the work.
The owner could perhaps have argued that the builder should have done a more thorough investigation and quoted higher accordingly, but did not really take this point.
On the other hand there was cogent evidence to suggest that a lot of the defects were covered up and could not be discovered until at least some work had been done. Hence the difficulty with quoting on this project.
The builder had entered into an industry standard building contract for an agreed price, that set out the works involved in completion of works on town houses, from a particular stage until completion.
The moral of that story was that a second builder on such a project needs to be diligent about the variations “paper trail” as required by the DBCA, and carefully document all variations and extensions of time.
In addition of course the quoted price needs to adequately cover the second builder for risk, given the adoption of the warranties owed to the owner (and therefore the risk on the job).
There is probably still some confusion in the industry about how long a builder is accountable to an owner for. The period is 10 years based on section 134 of the Building Act 1993, as that is the time post completion that an owner can bring a ‘building action’.
This is not to be confused with the domestic building insurance that a registered domestic builder must have for every building project, before a deposit is paid.
This is only insurance in place to protect the owner in certain defined events, it is not a panacea for a builder. The Insurer will seek recovery from the registered builder after a payout in any event.
- Intends to use their own skills to build, extend or renovate their home;
- Intends to manage sub-contractors to do the work; or
- Is a registered builder who does the work on their own property.
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.
An owner builder takes on many of the responsibilities of a registered builder, as governed by the Building Act and the DBCA. For example, an owner builder owes warranties as a vendor to any new owner based on Part 9 of the Building Act.
- Provide a defects inspection report not more than 6 months old from a registered building practitioner for all work; and
- Take out domestic building insurance for work valued at more than $12,000, to protect the purchaser.
An owner builder must still of course have all requisite building approvals, mandatory inspections passed and obtain an occupancy permit or certificate of final inspection.
However, as they are not registered builders generally, and may just be managing their own contractors, the quality of work can suffer.
On this basis, a second builder rectifying and completing an owner builder’s work will need to be wary and allow for risk when quoting their works.
The second builder will in turn be taking over the warranty obligations that are then owed back to the owner builder. They will need to use a compliant domestic building contract for all work over $5,000.
Only a proper industry standard contract should be used and the scope of works needs to be properly set out in the schedule and specifications. The procedure for variations in the contract should be followed to the letter.
Domestic building insurance will need to be in place before you start, for all works over $12,000 in value.
For comprehensive legal advice about your rights and responsibilities in this area, please contact Lovegrove & Cotton, before such time as problems show signs of evolving.
