Entering into a Building Contract to build your home is a monumental moment for many which is why it is important that you know exactly what you are signing and the terms you are agreeing to before it is too late.
Building Contracts can be either a standard form Master Builders Association of Victoria or Housing Industry Association Building Contract and may contain the Builder’s Special Conditions in addition to the General Conditions. The Builder’s Special Conditions alter and take precedence over the General Conditions.
The Builder also sets the Default Interest Rate, Margin Rate and Damages Rates (both for late completion by the Builder and delays caused by you) in the Building Contract.
Whilst you, as the owner, have statutory protections, Building Contracts favour the Builder by default.
Contract Price
Is the Contract Price really fixed?
Whilst a Building Contract sets out a Contract Price, the Contract Price is not always fixed, especially given the current building material and labour cost inflation.
The Contract Price can be increased (or decreased in rare occasions) by:
- Interest on late progress payments;
- Variations (i.e., alterations to the building works); or
- Prime Cost Item or Provisional Sum exceeding the Builder’s estimates.
If you, or your Lender in instances where you are obtaining finance, fail to make a Progress Payment by the due date, interest will be charged at the rate stipulated in the Building Contract which consequently increases the price.
Variations are alterations to the building works that either you and the Builder agree to make or that are ordered by the Building Surveyor. Variations can be changes to Specifications such as the floors, the doors or the tapware finishes or something more drastic such as the Building Plans. In any case, these variations will often entail an increase to the Contract Price.
Section 3 of the Domestic Building Contracts Act 1995 (Vic) defines a Prime Cost Item as “an item (for example, a fixture or fitting) that either has not been selected, or whose price is not known, at the time a domestic building contract is entered into and for the cost of supply and delivery of which the builder must make a reasonable allowance in the contract.”
A Provisional Sum is an estimate of the cost of carrying out particular work and any materials required for said work, such as excavation.
Where the cost of a Prime Cost Item or Provisional Sum exceeds the amount estimated by the Builder, you must pay the extra amount in addition to the Builder’s margin on that extra amount.
On the other hand, in the rare instance where the cost of a Prime Cost Item or a Provisional Sum turns out to be less than that estimated by the Builder, the difference should be deducted from the Contract Price.
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Method A or Method B
Building Contracts have two Construction and Progress Payment Methods.
Pursuant to Section 40 of the Domestic Buildings Act 1995 (Vic), Method A (sometimes referred to as Method 1) is the default Method with 5 stages of Construction and Progress Payments.
However, Builders tend to favour Method B (sometimes referred to as Method 2). With this Method, Section 40 of the Domestic Buildings Act 1995 (Vic) will not apply and you and the Builder must negotiate the stages and percentages of the Progress Payments yourselves. This method often involves more stages with more frequent Progress Payments, hence why Builders prefer this Method.
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Domestic Building Insurance
Domestic Building Insurance is mandatory for building works in excess of $16,000.00.
It is always our recommendation that you request a copy of the Insurance Policy and Certificate of Currency from the Builder prior to signing the Building Contract. The Builder may be reluctant to obtain the Insurance Policy until such time as the Building Contract is signed, however the Builder is prohibited from requesting payment of the Deposit prior to providing you with a copy of the Insurance Policy and the Certificate of Currency.
The Insurance Policy and Certificate of Currency must list your name and the subject property address.
We have had instances where the Builder has attached a copy of their Annual Contract Works and Construction Liability Insurance Documents. This form of insurance is not to be confused with Domestic Building Insurance.
Contract Works Insurance combines Public and Product Liability and Material Damage Insurance. Public Liability Insurance protects the Builder if a third party is injured, or the property is damaged during construction and Product Liability provides cover for risks after the works have been completed. Material Damage Insurance covers the Builder if they experience loss or damage to buildings, materials or equipment.
Such insurance is irrelevant with respect to the Domestic Building Insurance requirements under the Building Act (Vic) 1993.
Letter of Appointment
Builders commonly attach a Letter of Appointment of Building Surveyor to the Building Contract for you to sign. Where a Builder suggests a Building Surveyor it is usually a Surveyor that the Builder has had many dealings with and has developed a relationship with.
We had one instance where the Builder included a Special Condition in the Building Contract which made the Building Contract subject to the owner signing a Letter of Appointment for a Building Surveyor of the Builder’s choosing.
However, Builders are prohibited from appointing a private Building Surveyor under Section 78 of the Building Act 1993 (Vic) so, by making the Building Contract conditional upon the appointment of a Building Surveyor of the Builder’s choosing, the Builder had indirectly breached this Section of the Building Act 1993 (Vic).
Cooling Off
Having second thoughts?
 Pursuant to Section 34 of the Domestic Buildings Contracts Act 1995 (Vic) you may withdraw from a Building Contract at any time prior to the expiry of 5 business days by serving written notice on the Builder.
However, if you elect to withdraw from the Building Contract the Builder will be entitled to retain $100.00 plus the cost of any out-of-pocket expenses the Builder incurred prior to your withdrawal.
Please note, the cooling-off provisions will not apply where you have obtained legal advice from a Solicitor prior to signing the Building Contract.
Summary
Prior to entering into a Building Contract, it is prudent to have the proposed Building Contract reviewed by a Solicitor who can identify unfair and untoward conditions and assist you with negotiating better terms.
We can provide you with a detailed legal summary of the Building Contract and relevant documents and information as to the Builder’s registration status and if they have faced any disciplinary sanctions in the past to assist you with making your decision.
Get in touch with our Property Law Team for a comprehensive and thorough Building Contract Review or for further information.
