Contracts – Page 3 – A New House

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

Paying Contractors

Sponsored by CheckVault

The advice you always get about paying contractors is “Don’t pay until the works are complete.”

Easy to say. . . . . but most small contractors want payments up front!

Why Contractors Want Up-Front Payment

I have known a lot of small contractors and one recurring problem is getting payments for work they have done.

Although you hear plenty of stories about bad contractors I can assure you contractors have just as many stories about chasing debts from bad clients.

Many small contractors work on tight margins and the cash flow issue of one or more bad debts can easily send them broke.

You might think you are a reasonable person who always pays your debts, but how is that contractor you want to engage know that?

An Alternative To Up-Front Payment

An idea I have recently come across is CheckVault which works as follows:

You make a payment to CheckVault prior to the work commencing. (Payment can be by Bank Transfer, or even Credit card)
The money is then held in Escrow, by Perpetual Corporate Trust so your money is always safe.
The contractor carries out the work
Only when the work is satisfactorily finished the payment is released to the contractor from CheckVault.

This seems to be a good way of ensuring the work is done to your satisfaction while the contractor can have certainty of payment.

Other advantages are:

It stops the situation where contractors take money in advance and then use it to finance other projects.
Knowing the money is waiting encourages quicker completion.
Contractors who know their payments are secured may be more prepared to offer a discount.

See why ‘Cash Jobs‘ are a Bad Idea

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

New House Guarantees and Warranties

I’m always a bit suspicious of guarantees and warranties!

In my opinion most Guarantees are really just a piece of paper that explains how the Guarantor will fulfill their legal liabilities. (In some cases they explain a process which is less than fulfilling their liabilities)

Bearing in mind I’m not a lawyer this is how I see the situation with regard to new house ‘Guarantees’ and ‘Warranties’

Standard of Build

Under the ‘Standard Domestic Building Contracts’ the builder is required to build a house that is ‘suitable for purpose’.

That is it complies with the building codes and regulations and will not suffer structural damage or have any other major defect.

If you suffer a problem you can go back to the builder under the contract. In effect you have an Implied Guarantee.

If the defect was as a result of his construction or the materials they supplied, the builder is liable to remedy as long as the time since the contract was completed is ‘Reasonable’.

What is Reasonable?

Well it will depend on the State laws but in Victoria Section 134 of the Building Act 1993 places a limit of 10 years on the builders liability.

Previously builders were being chased for problems arising 20 or 30 years later, which was considered unreasonable. (If you want to see how unreasonable some homeowners can be see this link: Unreasonable Behaviour)

Builders Warranty Insurance

One source of confusion is that the Builder Warranty Insurance for new houses only lasts for the following periods post completion (or contract termination):

6 years for structural defects
2 years for non-structural defects.

This warranty insurance can only be claimed by the home owners, if the builders can’t meet their liabilities through death, disappearance, or been declared insolvent. . . . If the builder is still trading its up to the builder to provide the remedy Not the Insurer.

Avoiding Splitting Responsibility

I often come across people who want to exclude certain items of the work from a house building contract to save money.

They may want to do the work themselves, use their own tradie (relative or friend) or use a different supplier to install things before or during the build.

Liability for Problems

The main issue of splitting the House contract is that you can finish up with split responsibility, giving the Builder a ‘Get Out of Jail Free Card’.

If there is a problem during construction, or defect that is any way related to the service you excluded from the contract then:

Who do you chase for remedy; Builder, Supplier, or even accept responsibility yourself?
The Builder, and the Supplier, will usually deny all liability blaming the other.
Whoever you believe is at fault you will to take it to an appeal, or arbitration,which will take time and money
To support your claim you will probably need an independent professional opinion which will add to the cost.
There is no guarantee that the finding will be totally in your favour.

Examples of Issues

Here are a few common issues:

Delay If your build contract goes over time one of the Builder’s strategies to avoid paying Liquidated Damages is to claims your supplier delayed the works as they were slower than his normal supplier.
Theft Stealing is rife on building sites. Even though the Builder lets your supplier on the site there is normally an exclusion of liability for theft.
Damage Scratches, dents, marks, breakages, at best the builder may provide compensation at a level related to the cost related to the value of the cheapest standard replacement. (for example a standard GRP bath not your $2000 free standing ceramic bath)
Failure To Work Properly This mainly occurs on issues like plumbing or electrical items. Because of a lack of communication the wrong pipe or wiring has been installed, or the locations are incorrect. Again each blames the other and you can be up for an extra cost.
Damage Scratches, dents, marks, breakages, at best the builder may provide compensation at a level related to the cost related to the value of the cheapest standard replacement. (for example a standard GRP bath not your $2000 free standing ceramic bath)
Future Building Movement I have heard of people doing their own site preparation including cut or fill. In WA I know some people want to install their own drainage work (Soak wells). If you then get any building movement you may find you have given the builder a get out to avoid bills of tens of thousand of dollars.

I hope this helps you understand the issues, and also the risks, of splitting supply and/or work from the main building contract.

Personally I have always let the Builder provide a finished house and installed any extras later.

Cost Plus Contracts – Avoid

What Is A Cost Plus Contract

Basically it is a contract where you agree to pay all the builders ‘Direct Costs’ plus a ‘Fee for Administration and Profit’.

Rather than a quotation the builder provides an estimate with the actual cost being determined at the completion.

These type of contract are only supposed to be used when it is difficult for a builder to accurately price a job, or the client wants to keep making changes during the construction.

Most building professionals find managing ‘Cost Plus Contracts’ extremely difficult. They are not for the amateur!

The Problems

If the builder hasn’t the expertise to provide an accurate quotation will he have the expertise to manage the contract in a timely and economical manner?

There is no pressure on the builder to work in an efficient way, or select cost effective materials. The more money they spend the bigger their fee.

Who is going to evaluate and, check the builders costs?

Without constant monitoring you will be paying for all the Builders mistakes!

You might have a budget but with the contract requiring you to pay whatever it costs, plus the fee, its easy to blow the budget . . . By a long way.

If a Builder Suggests A Cost Plus Contract

Unless you can:

Really trust the builder, and
Pay for a full time project manager,and
Afford major cost overruns.

STOP and re-think your strategy.

This could be to either seek out builders who are able to give you a quotation, or get your designer to break the work down into more basic packages that can be individually quoted.

See Contracts for more posts

Fixed Price Contracts

Having a ‘Fixed Price Contract’ doesn’t mean the bottom line price of the contract will stay the same.

All it means is that the majority of prices for individual work items are fixed.

Here are reasons for changes in the final price:

Planning and Building Approvals Some blocks will have requirements placed on them that may only be determined after the plans are submitted; for example Bush Fire Prevention.
Site Works Sometimes the excavation of the foundations can reveal worse ground conditions than the three small test holes indicate. Normally the price is only fixed if the site investigations results are representative of the whole foundation.
Increases in Taxes or Charges Not a lot that you can do if the Government or Council changes the tax rules or scale of fees.
Variations on Building Works The contract prices are only fixed for the agreed drawings and specification, start changing things and prices can rise quickly!
Prime Cost Items and Provisional Sums Adjustment See the following links Prime Costs and Provisional Sums.

Also see Final Cost

Beware of Escalation Clauses

What Are Escalation Clauses

These are a way of allowing for inflation. Basically it provides a way for the builder to increase his costs in line with inflation.

The Clause will quote an inflation index which can be used to adjust the stage payments.

When Are They Used

I have only used escalation clauses in civil engineering contracts, when one or more of the following apply:

The contracts expected to take more than a year to complete.
The work will be carried out in a period of very high inflation.
If there will be a lot of imported materials and fittings that would be affected by a loss in value of the dollar.

Why I Don’t Like Them.

Taking the time pressure of the builder means there is less pressure on the builder to complete the works in a timely manner.
Escalation clauses are a way of transferring risk from the builder to you. . . . . . . If the builder want to have this clause is he going to offer a price discount for reducing his risk?
With imported materials there are alternative methods of reducing the risk of currency fluctuation, such as buying materials in advance.
Sometimes the inflation index may not relate accuratly to the actual costs paid out by the builder allowing them to make extra profit.

See Contract Payments for more posts

Delaying Progress Payments

So your builder has just made a claim for a Progress Payment . . . . . but you are not happy with the workmanship, or don’t agree that the Construction Stage is finished.

What can you do?

A lot of people would say “Don’t make the payment!” but it’s not quite as simple as that!

What The Contract Says

Here are some of the relevant sections from the HIA contract used in my last build.

A time limit for payment in days (Schedule 1.7* Will typically range from 7 to 10 days).
A rate for penalty interest if the payment is not made by the due date. (Schedule 1.8* Typically minimum of 15% per annum, calculated daily, but can be up to 25%)
The Builder has the right to Suspend the Works if not paid. (Clause 35*)

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

As you can see just not paying the payment could have considerable consequences.

Suggested Action

In my opinion it is better to try and avoid, or minimise, the above consequences.

Also in the event of future legal issues it is also best to be seen to be ‘Reasonable’.

My suggested actions would be to write to the builder (Not phone) as soon as possible stating:

That you do not believe that all the works comprising the stage had been satisfactorily completed.
Why you believe the works had not been completed.
Offering to pay 80-90% of the amount by the due date.

In effect you are only paying for the work that has been satisfactorily completed, rather than the whole claim.

This approach is more likely to maintain a cordial approach to your relationship with the builder while making sure they are aware that they need to ‘Lift their Game’.

See Payments for more posts

Using Your Own Building Inspector

I frequently hear of people being told by their Builder “You can’t use your own Building Inspector!”

If your builder says that, he is trying to Con You! ……or Breaking The Law!

Here is an explanation based on my last House Contract (HIA Standard Contract) . . . . . .

Possession

The builder does have ‘Control’ of the site see; Contracts – Site Possession.

But one of the contract clauses states . . . . . . “The OWNER or an authorised officer of the LENDING BODY is entitled after giving the BUILDER reasonable prior notice, to go on the LAND to inspect the BUILDING WORKS at reasonable times provided that such inspection does not delay or interfere with the progress of the BUILDING WORKS.”

Owner

A key element in the above clause is the word OWNER so lets look at how the contract defines OWNER . . . .

‘OWNER‘ means the person, partnership, or company named in the Particulars of the Contract and whenever appearing in this Contract includes their AGENTS, executors and administrators.

This means you can appoint anyone you want to act as your AGENT in the matter of inspecting the works.

Action

Don’t ask, write a formal letter to your Builder informing them that you have appointed a Building Inspector as your Agent.

If you find the builder has put in a clause in the contract saying you can’t use your own building inspector this is illegal. You can have that clause struck out. (see this link: Unfair Contract Terms)