I’ve just spent another day with a client whose building project went off the rails.

The project is at least 12 months behind schedule and likely at least a hundred thousand dollars over budget.   This is financially painful for the client and enormously stressful and frustrating for the client.  The remedy will involve further delays, legal fees and more stress for the client.

From my professional perspective, this sort of outcome is all too common.  The building industry is notorious for projects that are late and over budget.  Despite this, the impact on the builder who delivers a project late and over budget is often minimal.

I believe that there are a number of key reasons and weaknesses in the standard HIA and MBA Domestic Building Contracts that significantly contribute to these sorts of problems.  After all, these contracts are prepared by builders for builders.  Add in a legal system that is unable to deliver results for property owners in a timely or cost effective fashion and you have a system that is simply unfair to property owners.

If you are (or someone you care about is) thinking about signing a building contract – for a renovation, for a new home or for a development project – please don’t sign the contract until you have read this article which sets out 5 key lessons in relation to domestic building contracts. 

Issue 1 – Domestic Building Contracts are prepared by Builders for Builders

This may seem rather obvious. The Housing Industry Association and the Master Builders Association are bodies that represent builders and their interests.

However, many property owners think or are bluffed into thinking that the contracts prepared by the builders’ unions are not to be changed and cannot be altered. Certainly, many builders will encourage this sort of thinking.

It is critical to realise that the contracts have been prepared to suit the builder and therefore they are quite one sided in many respects. They can be changed and I believe they must be changed if you want a fairer contract.

Issue 2 – Liquidated Damages

The standard contracts often specify that liquidated damages are a nominal figure such as $250.00 per week. Builders have a range of justifications for this – including that this figure is recommended by the MBA.

As a property owner, if you think about this, $250 per week is quite insulting. The builder is already entitled to extensions of time for delays outside their control – for example covid and delays obtaining key materials etc. What is left is the delays that the builder could control – but hasn’t for one reason or another.

If you have a modest development which involves say a $1 million block of land and a $1 million duplex build – your total investment close to the end of the project is therefore $2 million. If this is largely debt funded using a construction facility with an interest rate of say 5% – then each week of delay will cost roughly $2,000 in interest. If you are building a new home – an extra week’s rental may cost you $600 per week. These are more reasonable amounts for liquidated damages.

I believe that, if the builder has to pay the full costs of delays and inefficiency, they will be much more motivated to complete your build on time!

Issue 3 – Progress Payments

The standard contract stipulates that the builder can provide a one page bill and you will pay tens or hundreds of thousands of dollars within 7 days.

If you are relying on construction finance this is likely to be unrealistic. Your lender may need more than 7 days to process the claim. Your lender may also require more information to support the claim.

BEFORE you sign the building contract speak to your funder or broker about how long they typically need to process a claim and what supporting documentation the funder requires. Make sure the contract provides for this.

Don’t find yourself in a situation where you are obligated to make a payment under a building contract that your construction funder isn’t obliged to pay!

Issue 4 – Extensions of Time and Variations

Where situations arise that entitle the builder to extra time to complete the build or entitled the builder to increase the build price the builder is supposed to provide you written notice. What often happens in practice is that you receive a bundle of these variations and extensions with the final claim. By then it is too late to change anything and often too hard to dispute the claim.

The solution is to amend the contract to provide that extensions of time and variations must be notified to you within 30 days of the issue arising. Failing this the builder should waive the right to claim.

Issue 5 – The Final Payment

Once the building work is complete the builder will issue a final claim. You should then inspect the property (ideally with the assistance of a professional inspector) and list for the builder any observed defects. The builder is entitled to be paid once the defects are rectified.

The issue here is that the builder may refuse to fix some defects, claim for dodgy extensions of time and variations and refuse to allow liquidated damages.

As property owner, if you choose to dispute the claim you will be locked out of your property until the builder agrees that the final claim has been paid. If you are paying $2,000 a week of interest on your mortgage you will be under significant pressure to give in and pay the builder. This will happen even if you don’t think the claim is fair.

Resort to VCAT is a 12 months + process that is simply not viable in the circumstances.

The solution is to include a special condition that allows you to pay disputed funds into trust. You then get possession of the property on payment. You can then move in, sell the property or settle your pre-sales. You can dispute the builder’s final claim from a much more comfortable negotiating position.

Conclusion

PLEASE don’t sign a building contract without carefully reviewing the contract and thinking it through. My advice is that the contract can be changed and must be changed to ensure that it is fair to you as the property owner / customer.

The above is not an exhaustive list of issues – but rather our top 5 issues that you need to consider before you sign a building contract.

You can purchase our recommended special conditions for either the HIA or MBA Domestic Building Contracts by clicking here.

I am confident that these special conditions will help reduce the chances of delays and cost overruns and improve your negotiating position when complications arise. I GUARANTEE that these special conditions will add at least 5 times what you pay to the bottom line of your next building project. If you don’t get this sort of benefit – let me know and I will refund your purchase price in full.

This is some unprompted feedback from a client:

“I have been in discussions with the builder about the special conditions you recommended to add in the build contract and I think it went well as the builder has agreed to most of the conditions ….  I’m happy with the result and as usual very happy with your services, great work!!”  Corey – March, 2022

As an alternative, contact me and we can arrange for the fixed fee of $770 a formal building contract review including a written review, suggested special conditions and a follow up phone call.

Don’t commit to an unfair contract worth hundreds of thousands or millions of dollars without getting advice first!