Avoid a contractual nightmare! [Updated Nov 2023]

There are many property owners who will happily sign a standard building contract in the belief that it will offer them enough protection if anything goes wrong. But do you really know what you’re signing? Is it really offering you the protection you need?

Many of my clients have me advise them on their building contract prior to signing, and then administer the contract on their behalf. By that, I mean that I ensure that the builder sticks to the terms and conditions of the contract and that the owners’ best interests are protected.

But other people will simply sign a contract without fully understanding the potential problems that they have just created for themselves.

A good example of a bad deal

Recently I did a design for a client who stated that they only needed the design they did not need any further assistance, which is fine as occasionally I come across clients with enough free time and experience to manage projects for themselves.

A short time later I happened to be talking to them and they mentioned that they were about to sign the contract their builder had supplied them with. Now normally I wouldn’t get involved, but out of interest I asked if I might be able to look at it just out of curiosity.

Here’s what I found hidden away in their Master Builders Standard Residential Contract:

– Retention was not available under their contract

Now for those of you who don’t know, retention is where a percentage of the total contract value (typically around 5%) is retained by the owner and not released until any defects are repaired. The way that the contract should work is that the builder would complete the work and half of the retained percentage would only be released after your architect (occasionally the owner) issues a notice of practical completion. The balance would be issued typically after a 3, 6 or 12 month period once your architect has gone through and done a ‘final certificate’ inspection.

That is how it should work, but in this contract, there was no provision for retention, and the builder’s final payment was due to him as soon as he submitted the defects list to the owner. Note he only had to submit it he was not bound by the contract to actually fix any defect first.

My clients were not overly concerned by this at first, believing that the builder would be responsible for those type of repairs regardless of what the contract said. That was until I pointed out that it might be difficult to get him back to do the work quickly, given that he would already have been paid.

– Liquidated Damages are mentioned but there are many loopholes

Liquidated Damages is a clause that is designed to cover you in the event of the builder not completing the building within the specified timeframe. Often this is not a major concern, however, it is if you are selling your current home and have to be out by a certain date. If your new home or renovation is not ready to move into, then you will almost certainly need some short-term accommodation until it is.

Liquidated Damages can cover such things as alternative accommodation costs, loss of rent and additional finance costs & holding charges. And whilst Liquidated Damages were covered in the contract, there were many ways for the builder to effectively get out of his obligations under this clause.

For example, the builder could claim for extensions to the completion date for things like ‘unavailability of materials’. Keep in mind that the builder should organise all materials before commencing construction. This is something that should be known well in advance, but the wording of the contract was such that it allowed this to be used as an ‘out’. Bad weather was another way that the builder could get an extension, and whilst this may be reasonable, the wording of the contract left that open to be used as a convenient excuse.

– Payments

Another problem I saw with the contract was around payments. Monthly payments were not standard in the contract, which instead allowed for staged payments. Now, this might be fine, but the stages might not be consistent in timing which was not ideal for my clients. The builder had also requested a deposit be paid upon the signing of the contract which is something that I would advise against.

Needless to say that after talking to me my clients re-engaged me to look after the contract negotiations and administration.

– Other potential problems

But it’s not only contracts that you need to be wary of. It’s not uncommon for builders to supply a seemingly low price that includes a lot of provisional sums in it that do not accurately reflect what the owner actually wants.

There are also some builders who work for ‘cost plus’ which effectively means you need to pay them their fee separately to everything else. You, therefore, are responsible for paying tradespeople, sub-contractors and all material costs completely separately to the payments you make to the actual builder themselves. It’s not uncommon for people who enter into these arrangements to find that they have exhausted their budgets well before the project is actually completed.

So whilst you can look after the contract yourself and even the management of the project, it’s not advisable. It’s too easy to make a mistake that can end up costing you dearly.

Unsure how to protect yourself? If you aren’t experienced with building contracts, it is vital to get a second opinion. If you’re on a strict budget this could be something as simple as asking a friend who is experienced in building contracts for some advice.

If you truly want to make sure you’re safeguarded from any hidden surprises, it is advisable to speak to a professional who works with these contracts on a regular basis – someone who is independent and will give you truthful, helpful advice.

Dion seminara architecture can help with all your contract needs. If you’re considering building and want to make sure there aren’t any nasty surprises waiting for you, get in touch with us today!

Click here to contact dion seminara architecture.