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

 

Contract Documents – Order Of Importance

Of course the contract documents are the most important thing when organising the building of a new house.

However not many people realise that some parts of the contract document are more ‘important’ than others.

All three of these parts of the contract are normally bound together and presented for signing.

The order of importance are:

    1. The Conditions of Contract. Usually either HIA or Master Builders Conditions.
    2. The Specification. Which details in words what is included and the quality.
    3. The Plans. Shows in diagram form what the house looks like and how the various structural elements are assembled.

As long as their are no inconsistencies the order of importance doesn’t matter. However if there is an an inconsistency then the more important document is the one that counts in law.

For Example.

Say you had asked for windows to be double glazed. Although the plans may have been changed to show double glazing the builders standard specification which is based on single glazing may have been inserted in the documents by mistake. The builder then installs single glazed windows. Legally  they could leave those windows in without reducing the price.

Although most builders would rectify such an error its well worth checking through all the documents thoroughly before you sign.

Don’t let the builder rush you…….take the documents home and spend a few hours looking through them!

Have you had problems with your contract documents ?

 

For similar posts see Contract Documents

 

Contract Security Clauses

Did you realise that there are clauses about a ‘Security Account’ in a Standard Building Contract?

No mortgage?

If you aren’t planning on a mortgage because

  • You are downsizing, or
  • Got a house loss  insurance payout, or
  • Getting a bank loan. or
  • Received an inheritance, or
  • Won the Lotto

The builder is likely to require money to be deposited in a Security Account.

Money deposited in the Security Account is to cover the cost of the build, and is  released to the builder when Progress Payments are due.

As the Security Account will have large sums of money depositedmake sure that all interest is payable to you.

 

If You Have a Mortgage

If you have an approval from your mortgage provider the builder normally is happy to accept the approval as adequate security.

 

 

 

 

Do You Need A Lawyer?

I hear a lot of people suggesting they get a lawyer to review their house building contract.

I”m not that sure that is a great idea, and its going to cost a fair bit of money.

Issues using a lawyer

  • Contract law a specialised area so your local lawyer may not have the expertise.
  • Builders tend to use either the HIA, or Master Builders, Standard Contract and most are unwilling to negotiate changes.
  • Although a lot of people feel the Standard Contract favour the builder I have managed a lot of contracts and my view is that they are reasonably fair to both parties.
  • A key consideration in contracts is that the drawings and specification match what you want, and I’m not sure a lawyer is the most appropriate person to advise you on that.
  • Standard Contracts are in ‘Plain English’ so don’t be afraid to read through yourself.
  • Generally you first port of call in a dispute will be the Fair Trading Department of your State

What does need checking?

  • Any Special Conditions that vary the Standard Contract. The Builder has a duty to point these out.
  • The Payments Schedule is fair.
  • The builder’s registration and Insurances are in place.
  • The drawing and specification correctly record all your requirements.

Alternative sources of advise

If you don’t feel happy checking the documents yourself I know that many independent building inspection services offer pre-contract reviews.

As these companies check on builders every day that are well experienced in what can go wrong with a contract.

They may also be able to give you an assessment of your builders quality standards.

I would expect to to pay up to $700 for a review.

 

This is a general opinion only and not to be considered legal advice

Why You Might Not Find A Builder Rating

Can’t find a quality rating for your builder?

Perhaps you should check your contract before you sign it.

Apparently some builders require customers to sign a contract that: ‘Prohibits them from publishing anything about the builder without the builders express permission.’

That could include sending a rating to a ratings website, or commenting on an internet forum.

It seems to me that any builder that has a clause like this has something to hide on the quality front.

You have been warned.

Want to find out more then check out the story at this link : Sydney Morning Herald

Update

Perth Home Builder 101 Residential removes “Unfair” clause banning customers from writing unapproved reviews
The Deputy Chair of the ACCC, who brought forward this case said “Consumers should be free to have their say about their experience with a business and must not face penalties for doing so.”

Unfair Contracts

Did you know that there is legislation in Australia that protects you from unfair contracts?

Fair Contracts

The two most common house building contracts are:

  • The HIA Standard Contract.
  • The Master Builders Association Standard Contract.

Both these contracts are considered to be fair, and over the years many of the clauses will have been tested in Court.

Some people say both ‘Standard Contracts’ protect the builder too much; but I have managed construction contracts for much of my working life and feel they are both reasonable to Builder and Client.

Changes, or Additions to a ‘Standard Contract’

Any changes to a standard contract have the potential to be unfair; however the Builder has a duty to identify any changes to a ‘Standard Contract’.

One of the first things you should check before signing your build contract is whether there has been any changes to the ‘Standard Contract’ and if you are happy with the changes.

You can usually buy a copy of your State’s version of a blank ‘Standard Contract’ for less than $20 dollars to compare your contract against.

What makes a Contract Unfair

A contract term is unfair if:

  • It would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of unfair conditions would be:

  • The builder unreasonably making it difficult to have an independent inspector visit the site and/or charging a fee to accommodate independent inspections.
  • Giving the builder the final right to determine the quality of their work.
  • Allowing the builder to make variations without getting client approval.

What happens when a Contract is Unfair

If you have signed a contract not realising is was unfair all is not lost.

The first step is to Contact the Australian Competition and Consumer Commission.

A finding that a contract term is unfair, and therefore void, means that the term is treated as if it never existed.

However the original contract will continue to bind the affected parties to the extent that the contract is capable of operating without the unfair term.For more information click on the ACCC link above.

When Did Your Construction Contract Start?

If there has been delays in a house building contract the question of compensation comes up (see this link: Liquidated Damages )

A key factor in assessing damages is knowing when the construction contract started; as it isn’t written in the signed contract.

In order to avoid paying out damages many builders will dispute when the start date is!

They may argue about the date, or even try to say the start date is when the slab is constructed.

Here is some information to make you better informed about the start date.

Definitions

Well here are the definitions in the two most common forms of contract for new houses

Master Builders Contract (2015 Victorian Edition) :
Commencement Date – means the date by which the Builder will commence to carry out works on the land” ( according to the standard contract the builder is supposed to advise you of the start date, but this doesn’t always happen)

Housing Industry Association HIA (2015 Victorian Edition):
Commencement – means the day on which the Building Works commence on the Building Site”

To me that means  ‘The day the builder erects a temporary fence, and installs a portable toilet’.

Recording  the Date

Once you know the temporary fence goes up make sure this is recorded by:

  • Taking a photo with a camera with a date stamp; or
  • Taking a photo with a phone camera and Emailing it to your self.

It also doesn’t do any harm to Email the Builder saying you have noticed the contract started on a particular date. . . . This will put the builder on notice that you are aware of the issues relating to delays.

Delays

To check up about delays during the build follow this link: Contract Period

 

Builder’s Christmas Shutdown

Every Year I hear complaints of “Everything has stopped on my House Build for a month

What can make it worse is when the builder ‘Tries’ to claim an ‘Extension of Time’ for the Build.

What Does The Contract Say?

Well I have looked through the HIA Contract for my last build and here are the relevant parts.

Schedule 1*

Schedule 1 is the place that the builder states the time for completion of the build.

It specifically provides the builder with the opportunity to show how many days are included for; Weekends, public holidays,  rostered days off, and other foreseeable delays. (Christmas, and Easter, shutdowns come round every year! . . . .You can’t tell me they are not foreseeable!)

Builders Right to Extensions of Time (Clause 34*)

Acceptable reasons for ‘Extensions of Time’are:

  • The owner requests a variation.
  • Suspension due to the Owner Breaching the Contract.
  • Inclement Weather. (Bad weather during a foreseeable closure doen’t count! . . . unless it is at the end of the period and leaves the site too wet for a quick start.)
  • Disputes with neighbours that are not the builders fault.
  • Civil Commotion or industrial action (Annual shutdowns are not industrial action!)
  • Anything not done by the owner or their agents.
  • Approval delays that are not the builders fault. (It is foreseeable that there may be a delay in getting approval over the Christmas and Easter periods!)
  • Anything the builder can’t control (By making appropriate allowance in Schedule 1 the Builder controls the situation!)

What You Can Do

Before Signing The Contract

Ask the Builder to provide in writing the details of the allowance for foreseeable delays to Schedule 1*

If The Builder Claims For A Christmas, Or Easter, Shutdown Extension.

Write back stating “Building Industry  Shutdowns during the main Holiday Periods are entirely foreseeable events that should have been allowed for in the Build Period”.

* In your contract documents the numbers may be different but you should find similar sections.

 

See Contract Conditions for more posts

 

Specification

Control of costs is really important if you don’t want to run over budget on your new home.

One of the key areas in controlling costs is understanding the specification of the house.

One of the traps that many people fall into is paying a deposit based  on an initial specification, They are then hit with major costs down the track to upgrade to the standard they want.

There are really 3 stages to the Specification of a New House.

Basic Stage

This covers the building of the main structure of the house and includes:

  • Floor Plans
  • External Elevations (what the house will look like)
  • Foundations
  • Construction (eg Brick Veneer , Double Brick. timber clad, etc)
  • Windows
  • Basic Insulation

 

Detailed Design Stage

This is when the things like fittings are detailed such as:

  • Kitchen cupboards and counters
  • Cooktops and Ovens
  • Bathroom Fittings
  • Tiles
  • Electrical Fit out

Watch out for the builder including Prime Cost Allowances

There are extensive checklists in the Guide to Selection that will help you through this stage.

Finishing

These are the finihing touches which may be included by the builder, but are usually done by the homeowner after the move. These typically include:

  • Driveways
  • Paths
  • Gardens
  • Pergolas
  • Pools
  • Outdoor Kitchens

If these are the things that you want included in your new house you need to be aware of the likely cost and make sure that you have enough left in your budget.

 

See Budget for similar posts