Understanding Your Building Contract Can De-Risk Your Investment

Building your brand-new house is inevitably a complex undertaking involving many parties and substantial financial commitment. So, it is very important to get the whole process right from the beginning. But like most things, what appears complex and difficult when you first look at it becomes much less so when you start to understand how and why it is the way it is. And in understanding your building contract you will be in a very good position to make sure you end up with the house as you wanted it and will avoid hassles, problems and cost blow-outs.

Parts of the Building Contract

To start with, every house construction must, by law, commence with a building contract in writing. The building contract is basically in two parts. The body, or front part, is a standard legal contract prepared in Victoria by either the Master Builders Association (MBA) or the Housing Industry Association (HIA). Each of these standard contracts are approved by Victorian government’s Consumer Affairs agency ensuring they are fair and equitable.

The second part is the Schedule and Attachments. These are the parts of the contract where the specifics applicable to your build are spelled out. The Schedule includes your name, the name and identity of your builder, correct site location of your block of land and specifics of the house that is to be constructed in great detail covering every aspect. Any special conditions also form part of the Schedule.

If you want to engage a solicitor to check out your building contract, it is the Schedule and Attachments that should be the focus so that both you and your builder agree on every part of what is to become your finished house.

Fixed Price vs Cost Plus

Next, the building contract sets out the pricing format that is to apply. Your contract will either be fixed price or cost plus. Fixed price contracts (such as those used by Resimax Group and Tick Homes) are by far the best and safest as they avoid costly surprises. Cost Plus contracts are mainly for large projects over $1million. With a Fixed Price contract, you know up-front exactly how much your completed house will cost and exactly what the staged payments will be. Your bank will also be much happier with a fixed price contract as they will only make progress payments on clearly defined and signed-off stages.

Stages of Construction

All houses are built in stages and these stages are defined in your contract. The stages commence with a deposit (usually 5%) and this starts the process. The builder will construct your house, and your bank will pay the builder, as follows.

Stage 1. The Slab. The concrete foundation. 20% of the contract price.

Stage 2. Frame.  The walls and roof. 25%

Stage 3. Lock-up.  The house is lockable and secure. 20%

Stage 4. Fix. The fixtures and fittings are installed. 20%

Stage 5. Final. All the work comes together as a finished house with all inclusions. 10%

The First, Second and Final stages are formally inspected and signed off by a building surveyor. This Government accredited professional works you, the owner. Their job is to ensure legal compliance and adherence to the building contract. When satisfied, they will sign-off certifying the most important stages and this will trigger the bank’s next progress payment to the builder. The house cannot be occupied until the building surveyor has issued an Occupancy Permit and this is linked back to the contract, ensuring exact compliance with the building schedule of inclusions and the plans and drawings for the building.

Things to Look For

From your point of view as the owner, things to look out for as you go through the building contact with your builder are:

• Understand what the standard contact clauses are, and what is to be specified by you for the site, the constructions specifications and the type and quality of materials and installations.
• Decide everything in advance, if possible, as later variations can prove costly in time delays and extra expense.
• Be wary of unanticipated site costs, such as underground rock, extra site preparations, temporary fencing and other expenses that are outside the actual construction of the house.

Your builder will deliver your new house to ‘practical completion’. That is, ready for hand-over and final payment. This may still not be 100% finished, but any further work will be of a minor nature only. It is important to note that the final inspection will include a defects report. Minors defects (adjustments only) are acceptable for hand-over. Major defects (structural issues) are serious and will result in the property not being given the necessary permits and the bank will withhold the final payment. This is the builder’s responsibility, but as the owner, you need to be aware of what these terms mean.

Minimising Your Risk

Finally, things you can do to minimise risk with your building contract are:

• Engage a solicitor who is a specialist in building industry contracts.
• Ensure all your paperwork (including your building contract) records your exact name, as shown on your passport.
• Use a registered, reputable builder and check that they are insured.
• Choose a fixed price, turnkey construction contract.
• Pre-design your house thoroughly so as to avoid later variations.
• Carefully check all inclusions and plans. Put everything in writing.

Following these steps and advice and taking the time to learn and understand your building contract and what each part means, will ensure your investment will come together in a cost efficient and stress-free manner so that you can start to enjoy the financial rewards for your careful management of this exciting venture.

To find out how a Resimax Group or Tick Homes building contract can save you hassles and cost, contact Resimax Group at investors@resimaxgroup.com.au