The Building Contract
A written building contract is important if you are thinking of building a house, renovating, extending or repairing your home, irrespective of the amount that you intend to spend. The building contract is also a vital document for settling any disputes with your builder. A building contract typically comprises of 3 separate documents. These are:
- The Building Contract: This is the legal document, typically in the standard form, which details the responsibilities, roles and rights of the builder and the consumer. There are various standard form contracts available. Be sure to consult a lawyer in the event that you are uncertain about the right one for the project.
- The Specification: This is the listing of your work that is to be undertaken, the items that are to be supplied and installed by your builder, as well as the manner in which specific work should be carried out. Because this is a technical document, it is important to consult your architect or the builder should you be unsure about the contents of the specification.
- The House Plans or Drawings: These will be prepared either by the builder or your architect or draftsperson. It is important to carefully review them to make sure that they outline the work in line with your plans. Make sure that they are approved by your surveyor who will then stamp it for approval.
To avoid confusion later, during the signing of the contract, be sure to request 2 copies of every contract document, while ensuring both you and your builder sign every page of all the documents.
The Act that regulates building contains provisions that are applicable to all domestic building work contracts. Below are some of the provisions which are relevant to all contracts for domestic building:
- The builder will undertake the works in a workmanlike and proper manner, in accordance with the specifications and plans detailed in the contract;
- The materials that the builder is to supply will be suitable and good for the use for which they are intended, and unless stated otherwise, such materials will be brand new;
- The work will be undertaken in line with and in compliance with all legal requirements and laws;
- The work will be undertaken with skill and reasonable care, and finished by the date that is specified in the contract;
- The works will be suitable for the occupation; and
- Should the contract state a particular use for the works, such work and materials used therein will be a reasonable fit for that purpose.
A building warranty may be supplied by builders for works exceeding a specific amount. Such warranties will typically run with the land and may be referred to by subsequent buyers of the property. Buyers of residential properties may enjoy the advantage of such warranties for a set period which commences from the date of the occupancy permit.
Generally, the laws governing domestic building works place restrictions on the cost-escalation clauses. These clauses are rather common in contracts for building and allow for an increase in contract price in some instances, including variations in the building work, as well as delays that are caused by the owner. Cost-escalation clauses in domestic building contracts are void unless the contract has a notice in the prescribed form that alerts the consumer on the clause’s effect, and the consumer initials or signs next to every clause in the building contract.
If during the construction the builder requests for more money than is permitted in the contract price, you should carefully review your contract before you agree to the payment. For instance, the builder can’t demand additional money due to inflation or wage increases. Check all demands of the builder against the cost-escalation clauses you initialed or signed at the time that you signed the contract.
Provisional Sum & Prime Cost Items
Consumers must always endeavor to make sure that each material and item of work has been priced properly, and that this price has been fixed into the contract. This is however not always possible. Certain items that are to be included in the work may not have been agreed upon prior to signing the contract. These may include white goods, tap-ware and tile selection which may be decided upon following commencement of the building project. With regards to such items, builders would typically estimate and include the prime cost item into the contract.
In the same case, some works may not have been agreed upon prior to the signing of the contract such as painting, fencing and landscaping. With regards to such works, the builder will typically estimate a provisional sum and include the same into the contract for building.
Most building contracts permit builders to charge substantial loadings in the event that consumers spend more than the estimate agreed upon for a provisional sum or a prime cost item. Moreover, before they enter into a building contract, consumers should be provided a list that contains detailed descriptions of every item of work, breakdown of cost estimates for every item, as well as how the builder plans on charging for any amount in excess.
The estimates for provisional sums and prime cost items are typically included in the fixed contract price. You should try and avoid having provisional sums and prime cost items included into your building contract. If these are necessary, make sure that a reasonable allowance has been made. Be sure to clarify in writing whether such an allowance is inclusive or exclusive of goods and services tax. The builder is required to provide the consumer with copies of receipts, invoices and other documents that detail the cost to the builder of any provisional sum or prime cost item.
Builders are required to provide consumers with a copy of the contract that is legible. Builders are also required to provide consumers with copies of any order, notice or other document that they receive, that relates to the building works, from any public statutory authority.
Take care with regards to the goods and services tax. Find out whether the contract price includes or excludes this tax. Is this tax included or excluded in the prime cost items and provisional sums? Should you be uncertain about the goods and services tax, be sure to consult an accountant. Avoid assurances or verbal agreements on goods and services tax, or about any other contractual matters. Ensure that everything is in writing.
Consumers may withdraw from contracts for major domestic building at any time prior to the expiry of 5 business days, following receipt of their copy of the signed contract. It is the requirement that contracts include a written notice that advises consumers of this cooling-off period. Should a consumer want to cool-off, all they have to do is complete this notice and serve it upon the builder in line with the provisions of their building contract.
However, if the consumer has entered previously into a similar building contract for the same work, or has received legal advice before they entered into that contract, they will not be permitted to cool-off. Should a consumer withdraw from their contract, their builder may retain a stated amount, out of any money already paid, in addition to any other out-of-pocket expenses. All other monies must be refunded by the builder to the consumer.
Building contracts will typically provide for payments to be made to the builder during various stages of the building work. The law regulates the amount that the builder can claim upon completion of every stage of the works.
Be sure to familiarize yourself with the progress payment provisions in your building contract. Ensure that you have adequate cash flow. Check to confirm that the builder has completed that stage and that they are now entitled to be paid. This is an important task for which you may receive assistance from a registered building inspector. Progress payments must be facilitated within the time permitted in the contract. Failure to pay a builder in due time may result in a penalty interest. This is also a breach of contract on the part of the consumer.
Avoid committing a large upfront payment to the builder. Such payments are full of risks in the event that the builder later encounters financial problems. This may mean that there isn’t enough money remaining in the contract for completion of the work. In the event that a builder becomes insolvent, you may not recover such payments, as the home warranty insurance places limitations on the payment amounts that consumers can recover from insolvent builders.
So while you’re getting ready to buy house plans for your dream home, note that very soon you will be dealing with builders and sub contracts who are expected to transform the house plans into a reality. No contract is ever the same, therefore you must ensure that you obtain the necessary information beforehand in how building contracts work. If done correctly, there will be nothing to worry about, during and after the construction process.