Negotiating Construction Contracts – Key issues for property owners
By Jeremy Quah
23 January 2019
The success of a building project whether in a commercial or residential context can, in many respects, turn on the strength of the contractual arrangements between a developer/property owner and their builder.
Yet often, property owners and builders are tempted to rush this process in the enthusiasm of starting a project which can lead to costly problems and delays down the track. We too often are asked to assist in building disputes which could have been avoided if the contractual terms of a building contract were more well thought through at the beginning of the project. With that in mind, here a few common issues which need to be considered when negotiating construction contracts:
1. Standard Form Construction Contracts
It is common place for standard form contracts such as the HIA contract, Master Builders, ABIC or Australian Standard to be used as the base form for a construction contract. Whilst these forms are useful templates, you should be aware that the HIA and MasterBuilders Contracts in particular were created for builders and as such are weighted more heavily in favour to builders.
Moreover these standard forms all require some form of tailoring in order to ensure that the client’s interests are adequately protected and should be carefully considered before being adopted. As always, standard form contracts have the potential to do more damage than good if they are not adjusted to suite the interests of the parties.
2. Scope of works
It is important that the scope of works is clearly defined and copies of relevant documents setting out exactly what is included in the price are agreed and included in the contract. Many disputes occur because parties have differing views on what was included in the original contract price and what constitutes variations. In particular, fit-outs and details around fittings benefit from clear articulation.
It is essential that a property owner ensures that a builder has adequate insurance to cover risks to the works, any existing property and for public liability. Moreover it is imperative that no monies are paid by the owner and no works commenced before this insurance in place.
Without insurance in place, the ability of a property owner to recover from a builder who goes into liquidation part way through a project and or the ability of an owner progress the build without significant loss is extremely difficult. For example, imagine a situation where the owner pays a deposit to the builder who forgets to take out insurance on a project, spends the deposit and then goes bankrupt.
The owner would have very little recourse to try and recover the deposit paid or to continue the build without having to start again with another builder and suffering whatever loss comes with that.
4. Progress Payments
Where your construction contracts include a Domestic Building Contract, the Domestic Building Contracts Act prescribes that payments are made in accordance with certain stages of a usual building process (eg. slab stage, frame stage, lock up etc.). Alternatively the parties can agree other stages of payment or payment at periodic intervals. Key issues to consider when agreeing how payments are to be made:
a. If you are obtaining funding from a bank, it is imperative to ensure that the milestones for payments are compatible with the banks requirements for payments. Banks may have certain restrictions on when they will make payments and they may conflict with what you have agreed with the builder.
b. You are able to readily assess or have an independent person (e.g. the building surveyor you appoint) to assess whether the stage has been completed;
c. The costs to complete a project are not disproportionate with the funds that you pay to a builder at any particular stage of the build.
5. Construction period and Delays
It is critical to agree a reasonable timeframe for the works and consequences for delays. Combined with this it is essential that both parties are clear on when that timeframe starts and when completion occurs since this often is a cause for disputes when calculating whether there has been delays which warrant either party being responsible for liquidated damages.
6. Due Diligence on the Builder
We would also recommend carrying out suitable due diligence on the builder. Consider the following questions:
- Are there any complaints or is there any disciplinary action against the builder noted at the VBA?
- Are they involved in any court proceedings?
- Have you seen their previous works before?
- There are number of organisations which can carry out some of this due diligence for you.
The above are just some of the issues which we would recommend that you consider when entering into construction contracts. In any event, entering into a building contract is a usually a serious endeavour.
If you have any further queries or need advice on any construction matters, please feel free to contact our construction team.