­­Building or Renovating your home – Which Contract to use?

When engaging with a builder to conduct building or renovation work on a property, it is easy to presume that building contracts only come in one form. This is often not the case and although there is a standardised form contract, there are additional kinds of building contracts and considerations.

Standard Form Contract

The most used form of building contract is the standard “industry approved” contract, which is governed by the rules set out in the Domestic Building Contracts Act 1995 (DBC Act). These contracts are related by industry associations, such as the Master Builders Association (MBA) and Australia Building Industry Contracts.

Section 31(1) of the DBC Act sets out the minimum requirements for a contract to be valid as follows:

  • is in writing.
  • sets out in full all the terms of the contract.
  • has a detailed description of the work to be carried out under the contract;
  • includes the plans and specifications for the work and those plans and specifications contain enough information to enable the obtaining of a building permit.
  • states the names and addresses of the parties to the contract.
  • states the registration number under the Building Act 1993 of the registered building practitioner who entered into the contract.
  • states the date when the work is to start, or how that date is to be determined.
  • if the starting date is not yet known, states that the builder will do everything that it is reasonably possible for the builder to do to ensure that the work will start as soon as possible.
  • states the contract price or, in the case of a cost-plus contract, how the amount that the builder is to be paid is to be determined; and

Though these contracts contain standard terms which comply with the DBC Act, there is room for negotiation between the parties. The contracts allow the parties to introduce information such as, costs completion dates, excluded work and outlining builders’ margins on variations and other similar terms. Most importantly the contract must be signed by both parties.

It is common to encounter one of these standard contracts and is important to note that there is provision for all parties to adapt to certain terms outlined in the contract, it is also essential to seek correct legal advice as the contract must comply with the relevant legislation and any amendments may have unintended  legal consequences.

Preliminary Advice Contract

A Preliminary Advice contract is used by owners and builders to engage the services required before construction of the project commences. The Preliminary Advice contract will have a fixed and agreed upon price. The contract will generally include services such as:

  • obtaining a soil report and foundation data; and
  • to develop design, plans and specifications for the construction or renovation of a home.

Engaging a Preliminary Advice contract allows an owner to better understand what construction the builder is preparing for, and any potential challenges that may arise. The contract also allows for the builder to more accurately set out the project’s expenditures and costs.

The Preliminary Advice Contract can be an introduction and establish the relationship between builder and owner, it is important to note that the Preliminary Advice Contract does not lock the owner into any construction contract for the home.

There are limits on the price of Preliminary Advice Contracts and it is important not to pay excessive sums for works before the work is commenced. Legal advice is recommended.

Mixed Use

A mixed-use contract refers to developments that integrate multiple aspects of design into one build. This can include apartments with a commercial space, shops situated on a ground floor, or office blocks with restaurants within the complex.

It is important that the negotiation phase of the contract is carefully considered when undertaken.

Issues that must be considered when drafting will be:

  • Timing
  • Subdivision
  • Parking
  • Management of any common property
  • Insurance

Consequently, parties must ensure their interests are well represented in negotiation and dispute resolution procedures are clearly defined to allow for any differences that may arise throughout the course of construction.

Fixed-Price Contract

Fixed-price contracts are where the fee under the contract is a fixed lump sum. This is the most common type of contract used for domestic building works with the exception for some situations, all domestic building contracts must be a fixed price.

It is important to be note 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.

Cost-Plus

Cost-Plus contracts differ from fixed-price contracts whereby rather than agreeing to a fixed-price for the building works, the owner agrees to cover the cost of the builder along with an agreed margin for the overheads and profit faced by the builder. Completed work will be calculated on an hourly basis as an alternative to a final contract price.

Pursuant to Section 13(b) of the DBC Act:

A builder must not enter into a cost-plus contract unless:

  • The contract price exceeds one million dollars ($1,000,000); or
  • The work to be carried out under the contract involves renovation, restoration or refurbishment of an existing building; and
  • It is not possible to calculate the cost of substantial part of the work without carrying out some domestic building work.

It is essential to obtain legal advice if considering using a cost-plus contract as these can be prohibited except in the above circumstances. The penalties for use of these contracts outside those situations can be serious. The builder must comply by providing a fair and reasonable estimate of the total final cost at the outset of the works.

Our Services

If you are about to undertake a construction project and unsure of the most appropriate contract, the team at Oldham Construction Lawyers can assist you with understanding your rights, risks and obligations prior to commencement.

For all building contract queries please call our Director, Daniel Oldham on (03) 9640 0002, or via email info@oclawyers.com.au

Daniel Oldham

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