Your New House Contract

The most important document you sign is the ‘New Home Contract’.

This document describes the house to be constructed and provides remedies to deal with any defaults by the builder or the house owner.

The more you understand the contents of this document the better you can sleep at night.

This post will briefly describe the contents of a typical ‘New House Contract’ . Other posts go into more detail about the individual parts of the contract.

Bound into a single package you should see.

  • A New Homes Standard Contract. This is most likely to be either; a Housing Industry Association (HIA) Contract or a Master Builders Association Contract. In my opinion both these documents are reasonably fair to the Owner. However if a different contract is offered; or the contract has been heavily amended beware.
  • Various Schedules and Attachments. These describe things like specific details of payments, naming legal entities legal rights etc.
  • Conditions of Contract.
  • Copies of Builders documentation. That is Registration, Structural Guarantee and Insurances Check these are up to date, especially Insurances.
  • Contract Estimate This should show how the price has been calculated including any variations in cost from the initial cost.
  • Copy of the Site Investigation (Geo-technical Investigation)
  • Specification, describing the construction, type of fittings, and finishes, of various aspects of the house in words.
  • List of the builders standard inclusions. (NB this will be less than you have seen in the Display Home!)
  • Full set of contract drawings including plans, elevations and structural details.

Make sure you read the whole contract before you sign.

If any of the above are missing ask for them to be included before you sign.

Remember if problems arise the first thing you should to do is go back and read the contract.

For similar posts see Contract Documents

 

Contracts – Provisional Sums

All new house building contracts will have a section for Provisional Sums.

These are used for work that  MAY be required, but the builder can’t provide an accurate estimate at the time of signing of the Contract.

The main area  for provisional sums is related to foundations where the limited information obtained during the Site Investigation may not truly represent the conditions found over the whole foundation.

A coule of examples are:

    • A rock item may be included even if the site is clay. This caters for any large boulders that may need to be removed.
    • An amount may be included for concrete piers if the amount of fill on site is hard to determine.

So the total contract price reflects the cost of building the house the builder will put in his best estimate of the overall cost of the build.

The provisional sum  will reflect the direct cost  of  those items to the builder only. (Overheads are included elsewhere in the contract price)

For example with a typical provisional sum item for removal of rock…… The builder will often include a figure of say $2,000 for excavation, and removal, of rock.

If there is no rock the contract will be reduced by $2,000.

Alternatively if the cost of excavator, labour and transport was $3,000 the final price will be increased by $1200. ($1,000 extra plus overhead percentage on the extra, typically 20%)

The builder is only allowed to add any overhead for profit and administration, to provisional sum expenditure items where they are above the original estimate.

Did you have any issues with Provisional Sums on your build?

See similar posts in Contracts

 

Contracts – Site Possession

Under the terms of a “Standard’ Building Contract you will be required to grant the builder ‘Exclusive Possession’ of the site once the builder is ready to start.

This means that the builder is responsible for, and is able to control, all people coming onto the site during the construction period.

The reasons for this are:

  1. Safety – The builder is responsible for the safety of everyone on site.
  2. Scheduling – Its harder to effectively schedule trades when you could be delayed waiting for other people to complete work.
  3. Cost – If the builder’s workers are delayed by having other workers in the way it can mean extra costs.

Practically what ‘Exclusive Possession means for you is:

  • Before you go onto the site you should contact the builder, who may only allow you on site if accompanied by the Site Supervisor.
  • If your bank, or building inspector, want to go on site to check on the works they also need to make an appointment with the Site Supervisor.
  • You may not be able to have other work done at the same time by other people. For instance:
    • Landscaping.
    • Home Automation.
    • Swimming pool or Spa installation.
    • Additional Electrical work.

If your builder says your other tradies or contractors can go on on site make sure you get their permission in writing with any conditions clearly stated!

Rural and Large Blocks

If you are building on a rural block, or just a large urban block it can be worth marking out, and even fencing, the house building site.

You then give the builder possession of the house building site only, and work on the remainder of the block.

 

Did your builder allow you to bring your tradies on site?

 

For similar posts see Contract Conditions

 

Contracts – Prime Cost Items

Some new house building contracts will have ‘Prime Cost’ items.

These are used for fixtures, or fittings, which the Client requires, but have not been finally selected prior to signing the Contract.

An example would be they want a professional level cooking appliance. but have not decided on the actual unit.

So the total contract price reflects the cost of building the house the builder will put in an estimated cost of supplying the particular fitting or fixture.

This price will reflect the cost of the item only.

The builder is not allowed to add any profit, administration, or labour costs, to prime cost up to the amount stated.

These are considered to be included in the overall contract price.

If the price is exceeded he is able to add his overheads (normally 20%) on the additional amount.

You are entitled to see a copy of the invoice as proof of the price paid by the builder.

Example

You might want an expensive European oven that wasn’t currently available from the builders local supplier.

The builder would put in the contract schedule a prime cost item of say $3,000 for the oven.

Once the price of the oven, delivered to the builders store, become known the contract price can be adjusted.

In the example above if the final price of the oven to the builder, with normal builders discount*, is $2,500 the contract will be reduced by $500.

Alternatively if the price was $3,300 the final price will be increased by $360.

*If the builder got an additional cash discount he keeps the benefit of that as he has to cover the cost until he gets paid at the next progress payment!

Watch Out

You need to check that the prime cost amounts in any quotation are reasonable. (For instance if you are planning for expensive tiles make sure the prime cost amount for tiles is enough for the tiles you like)

In order for a builder to win work builders may underestimate the cost of prime cost items. They know the contract allows them to increase the cost to you if they ‘have made a mistake’ in their estimate.

The more Prime cost items in a contract, the greater the chance of cost overruns!

 

See the following link for another cost item you need to be aware of: Provisional Sums.

 

 

See similar posts in Contracts

 

Builder Bankruptcy – Getting Information Together

Well if you have followed the advice of the  initial Bankruptcy Post you should have stopped all payments and made the site secure.

This will protect the money you have paid to date.

The next step is to get all the information about the build together including:

  • The original contract documents including, The ‘Drawings’ and, the ‘Specification’.
  • Evidence of all payments you have made.
  • Details of the Builders Insurance. The insurer should be mentioned in the ‘Contract’. If you haven’t got details of the cover you should contact the builders administrator and get a copy.
  • Any variations that you have requested.
  • Any increases of cost that the builder has notified you about, (for example Site Work Costs).
  • Copies of all council permits.
  • All other correspondence.
  • A record of how much work has been completed. As well as writing everything down (Takes lots of photographs)
  • Cost you will incurr,  such as paying fence rental.

Getting all this information together should help you, and your lawyer, in:

  1. Officially ending the old contract.
  2. Dealing with the building insurance (see your contract for details of the insurer) regarding assistance in completing the build.
  3. Organising a contract with a new builder to complete the works.

While you are getting the information you should try to keep in touch with your builders administrator to monitor the situation.

If another builder wants to buy your builder’s business that could  be the quickest and easiest way to complete your house.

For more legal posts see Contracts

See this Financial Post for the next step

 

If The Builder Goes Bust

House Building can be a high risk business…………..so what happens if the builder of your new house goes bust?

Legally

Your house building contract should have clauses included for the eventuality of the builder becoming insolvent.

Read the contract carefully but make sure you get in touch with your solicitor.

There should also be a Builder Insurance Policy,  in your name, so check the contract.

Practically

If a builder goes into administration it’s still technically trading and may be bought by another builder so the best thing is to keep in contact with the administrators.

If the builder is being liquidated remember the house is on your land and you have paid for a large part of what has been built through the stage payments. . . .  so the first thing you need to done is to protect your money and assets.

Here are some steps you should think about after you have talked to your legal representative:

  • If you can, put a stop on any stage payments which may be going through.
  • Go to the site and change any locks.(It’s illegal for tradesmen to remove items from a house in lieu of unpaid bills but that doesn’t stop them trying.)
  • If the site has temporary fencing talk to the fencing supplier about paying for the fence to remain.
  • Secure any materials stored on the site.
  • Organise insurance for the house for fire, vandalism and theft.

Once everything is secure you can work with your solicitor to formally terminate the contract and engaging a new builder to finish the work to the original plans.

Have you ever had a builder goes bust building your new home? and did it all turned out OK?

 

For the next step see Getting Information Together

For more legal posts see Contracts

 

Standard Building Contract or ‘Owner Builder Contract’

Some small builders may suggest they can package build a house cheaper for you if you become an ‘Owner Builder’*.

* Not be confused with True ‘Owner Building’ where you have the skills and propose doing a lot of the work yourself

Here are 8 reasons why you should think very hard about doing this:

  • You remove the protection of the standard building contracts.
  • The whole exercise is about removing responsibility from the builder if this is their attitude at the start how confident are you they are going to take responsibility for any problems during the build..
  • Do you fully understand the responsibilities and risks which can include extra costs that can blow your budget.
  • Do you have all the knowledge, skills and time to manage the build properly.
  • You will have to take a course (May be available on line) which is going to take time. This will only give you the most basic understanding of the process.
  • Most banks are very reluctant to lend to owner builders so finance is going to be an issue.
  • You won’t have the advantage of any of the standard builders guarantees which means that if problems arise later you will have to meet the full cost.
  • When you want to sell many people can be reluctant to buy an Owner Built House without guarantees.

I have heard of several cases where this type of job went wrong but it may be successful for you.

For Similar Posts see Choosing a Builder

 

After The Deposit

If you decide that you want a house built by a builder you will normally be given a budget price and asked to pay a deposit.

What happens next?

These are the steps that follow in progressing to a full contract:

1. Survey

A survey of your site need to be completed if one hasn’t already been done.

This will allow the builder to work out if there is any additional excavation, or fill required over the standard allowance.

2. Soil Test

A Soil test needs to be done.

From this the builder will work out if there is change in foundation requirements, over the standard allowance.

3. Initial Meetings With Builder

This has two parts

Initial Contractual Discussions

      • Being informed of the cost implications of the survey and soil investigation
      • Making any changes to layout and elevations
      • Agree the position on the Block.

Selection  (sometimes called Gallery.)

Items selected typically include:

          • Bricks
          • Roof tiles
          • Heating and cooling
          • Electrical fit out
          • Floor tiles
          • Wall tiles
          • Kitchen units
          • Oven and hob
          • Bathroom and toilet fittings
          • Paint colours.

NB. Sometimes Builders do this meeting after Signing of Contract when it is normally called Pre-start

Much more information is included in my  Selection Guide 

4. Finalisation meeting with Builder

This will be to sign the Contract Documents.

Before the meeting:

        • All the details should be confirmed together with the final price.
        • The council approvals should have been obtained.

You need to make sure that all the changes you want are included both in the words of the specification and in the drawings. My advice would be to ask for the contract documents a few days before the meeting so you have plenty of time to check them.

 

You then have to wait until the builder is ready to start Construction which hopefully won’t be too long.

 

For similar posts see Selection and Contract Documentation

Understanding Contracts – Liquidated Damages

There is the opportunity in the standard new house building contracts to be compensated if the building takes longer than the agreed ‘Contract Period‘.

This is called ‘Liquidated Damages’.

The basis of the ‘Damages’ that the builder is likely to be subject to are typically a week’s rent for each week the contract is delayed.

If the liquidated damages are large it will act an an incentive for the builder to complete on time. (See: Contract Period, to find out what delays are acceptable)

The amount of damages is set before the contract is signed and should be a reasonable estimate of the actual ‘Damages’ that will affect you.

How Much?

Typically the builder will suggest an amount which, unless you object, will be the figure that appears in the contract.

For our last building contract which was for a contract period of 9 months the Liquidated Damages was set at $250/week.

I have heard that now that some builders are offering very short build periods. . . . but they want to minimise the financial risks of any delays. (One way of reducing the risk is to offer minimal Liquidated Damages amounts like $1/week so there is no penalty for finishing late. This means there early finish offer is meaningless)

Alternative Amounts

There is nothing to stop you objecting to the builders amount and suggesting a higher, but still reasonable figure.

The builder however may say that due to the increased financial risk the overall price of the house to you will go up.

I think the best approach to get a quality house is for a reasonable contract period rather than go for a fast build.

You should then look for a liquidated damages amount around the equivalent to a weeks rent where you are living..

Whatever you decide make sure you look at the Liquidated Damages amount before you sign the contract.

 

For similar posts see Contract Documents

 

How Much Should Stage (Progress) Payments Be

When you contract someone to build a new house you are required to make regular payment as each STAGE is completed. . . . But how much?

Well builders want to get paid as soon as possible so they will want the early payments to be as big as possible.

You as the purchaser need to make sure you aren’t paying for work that’s yet to be done. (See this link: If The Builder Goes Bust) You will need enough money to finish the house!

A good guide to what’s fair is found in a Victorian Government Act which lay down the following percentages of the full contract price:

    1. Deposit 5%
    2. Base 10% – (Check on this link to find  what you get; Base )
    3. Frame 15% – (link at: Frame 15)
    4. Lock Up 35% – (link at :Lock Up)
    5. Fixing 25% – (link at Fixing 25%)
    6. Completion 10% – (link at: Completion)

In Victoria many builders will ask you to sign an agreement accepting that the above payment levels don’t apply and the percentages will be similar to those shown below.

In other Australian states where there is no Act controlling the amount of progress payments then the builder is more likely to want the following values of progress payments.

    1. Deposit 5%
    2. Base 20%
    3. Frame 20%
    4. Lock Up 25%
    5. Fixing 20%
    6. Completion 10%

Think very carefully before you accept these different payments, as it increases your level of risk if things go wrong.

Before you make each progress payment, you need to check the work comprising the stage is:

    • Complete
    • Meets your contract requirements
    • Meets the building regulations

If you are not confident checking the work it may be worthwhile using an independent building consultant to check everything before you make progress payments.

If you want to check yourself you may find this link: PCI Guide useful

Whatever happens do not pay any money in advance of when the contract requires it.

 

For more information about when Progress Payments are made see Construction Stages

For similar posts see this link: Contract Documents

 

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