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.

3. Insurance

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.

 

Disclaimer
The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.

Related Articles

View All
Construction / Owners Corporations / Planning

Occupancy permits – the ticking clock in defective building work

Where multiple occupancy permits are issued in relation to a building permit, which permit is the operative permit for...
Read More
Commercial Contracts & Agreements / Construction / Construction

My builder has gone into liquidation. What do I do?

In recent times it seems like a week doesn’t go by without another building company becoming insolvent as...
Read More
Construction / Construction / Developments

TLFC Law’s Blog Highlights for 2019

Read on for our 2019 blog highlights The Sun Sets on Developer Rights PROPERTY LAW Following lengthy discussions in...
Read More
Construction / Construction

Security of Payments Act Lessons from 2019

On the global financial front, the trade-war between the US and China continue to brew whilst Great Britain continues...
Read More
Construction / Owners Corporations / Owners Corporations & Strata

How the Lacrosse Tower fire prompted a shake-up of the Australian Building and Construction Industry

The State Government has committed to directly fund half of this $600 million package, and plans to introduce changes...
Read More
Construction / Construction

Quantum Meruit Claims in Construction Contracts

Generally a quantum meruit claim cannot be made if there is an existing contract on foot between the parties that...
Read More
Construction / Construction

Demystifying the Adjudication Process

It applies to any construction work and/or related goods and services carried out in Victoria The purpose is to offer a...
Read More
Construction / Construction

Mutual Recognition- an assessment of equivalence

The High Court has rejected the Victorian Building Authority’s attempts to impose its own level of assessment of...
Read More
Construction / Construction

When it all Ends in Tears: The Importance of Domestic Building Contracts Part 2

Legal advice is crucial to mitigate risks faced during the building process However, not all risks can be fully avoided...
Read More
Construction / Property & Development / Construction

What Developers should look for in a Vendor Statement

The Vendor Statement in particular is often the starting point for a developer’s due diligence enquiries and it is...
Read More
Construction / Construction

Look before you Leap: The Importance of Domestic Building Contracts Part 1

The process can be a logistical nightmare requiring coordination of council permits, architects plans, engineering...
Read More
Construction / Construction

A Tale of Two Cities: Laws Diverge on SOPA Protections for Insolvent Claimants

These protections are contained in the Building and Construction Industry Security of Payment Act 2002 (Vic) and...
Read More