Tag: Contracts

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

 

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

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

 

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

 

 

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

 

Contracts – Contract Period

In your house building contract it will quote a Building Period. This starts when the contractor actually starts work (Site Clearance)

The period will be in days. (Calendar days not working days)

The time should allow for any expected loss of productivity due to:

    • None working days including
      • Weekends.
      • Public Holidays.
      • Rostered Days Off.
      • Christmas and Easter shut Downs.
    • Inclement weather including;
      • Heavy Rain.
      • Waterlogged site following heavy rain.
      • Strong Winds.
      • Excessive Heat.

An example would be my last Building Contract………… This had a time for completion of 260 days which included allowances of:

    • 25 days due to inclement weather.
    • 71 days for weekends Rostered days off etc.

The only time the builder has ground for extending the contract period is if: there has been unexpected delay that could not have been reasonably predicted. Such as:

    • Industrial Action – May be at a suppliers factory or be be something like a truck drivers strike.
    • More Inclement Weather – For instance a much wetter winter than average.
    • Delays Caused By You – Asking for Variations after contract signed, or not getting permits in agreed timescale, are examples.

If the builder want to claim an extension of time due to an unexpected delay he has to tell you of the delay as soon as he becomes aware of the delay.
Putting in a claim for an extension to avoid Liquidated Damages at the end of the contract is not acceptable.

 

For similar posts see Contracts

 

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