Category: Payments

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 – 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

 

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

 

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:

  1. You make a payment to CheckVault prior to the work commencing. (Payment can be by Bank Transfer, or even Credit card)
  2. The money is then held in Escrow, by Perpetual Corporate Trust so your money is always safe.
  3. The contractor carries out the work
  4. 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

 

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.

  1. Taking the time pressure of the builder means there is less pressure on the builder to complete the works in a timely manner.
  2. 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?
  3. With imported materials there are alternative methods of reducing the risk of currency fluctuation, such as buying materials in advance.
  4. 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:

  1. That you do not believe that all the works comprising the stage had been satisfactorily completed.
  2. Why you believe the works had not been completed.
  3. 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

 

Post Contract Variations

The best advice I can give is:

“Avoid making Post Contract Variations”
The reasons are:

Cost

Basically the builder holds all the cards once the contract is signed.

They can quote you the top price for the change…..plus a percentage for the variation which you will find in your contract (normally 20%)

If you deduct something you only get a reduction for the cost of the item and may have to pay an admin charge for any drawing changes.

There is a saying in the building industry the basic price is the Milk but the variations are the Cream!

Delay

Once you ask for a variation the gives the builder the reason to require an extension of time on the contract.

I have known of some high end builds to have doubled the cost and time of the build on Post contract variations.

Don’t rush signing the contract!……..It’s well worth taking some time and making sure you have made your mind up about what you want!
 

Also see When You Find Out the Cost

 

Final Cost – When Do You Find Out?

Some people think that when they pay an initial deposit, and leave the Builders Sales Office they know how much their house will cost…………..If you are unlucky, and/or don’t know how the system works you could be hit for unexpected costs in the order of tens of thousands of dollars.

These are the times when you find out about costs:

Initial Deposit

Unless you ask at this stage all you will know is the basic house price.

It will pay to spend sometime asking about what any alterations to the plan, brick and roof choices, and upgrades will cost.

Although you will get some information it is unlikely to be complete.

Pre-Contract

When you find out about site costs including:

  • Any Excavation /Fill
  • Additional Foundation Costs.
  • Restricted Site Costs – Generally for Demolish and Rebuild, and Battle Axe projects.
  • Potential Rock Cost.

You should also get the costs of any structural changes.

If you have got a flat site with good soil the extra costs can be minimal, an additional $5,000 wouldn’t be unusul for a typical site. If you have a difficult site it might be an extra $30,000 or more.

Selection*

The stage when you make all the “little” alterations such as:

  • Electrical fit out
  • Heating
  • Bathroom Fittings
  • Kitchen Fitings
  • Etc, Etc.

Be very careful at this stage, if you go for minor upgrades to the standard fit-out it could increase the costs by $1-2,000. Try to duplicate the Display Home and you can increase the base costs by 50%.

For more details why not get the Selection/Pre-Start Guide for only $4.

*Some Builders don’t do the selection of final fittings until the Pre-Start Meeting (after you have signed the Contract)

Contract

You will get an ‘Overall Build Cost” of the build with the site costs, together with all your amendments and upgrades.

A few things to check that might change the cost are:

  • Provisional Sums-Typically rock or Concrete piers
  • Prime Cost Items – Unusual items the contractor hasn’t been able to price.
  • Cost of Service Connections – Normally the contractors price will cover a distance of 5-6m. If you have a larger setback you may be charged separately.

Completion

This is the time when you find out what the total payments to the builder will be.

Unless you have made a number of Post Contact Variations, or the Provisional Sums haven’t been enough for the conditions encountered, it should be very close to the Contract Sum.

6 Months Later

I don’t know about you but I find there are lots of costs when I move into a new house.

For the first couple of weeks I seem to visit Bunnings at least every day for picture hooks, toilet roll holders, door hooks etc. etc.

Some of the bigger costs are:

  • Additional paths
  • Clothes hoist
  • Plants, and turf if you want an instant lawn
  • Curtains

 

For more information see What Will it Cost?

For help with Pre-Start/Selection see the anewhouse Guide

 

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