Guide to Building contracts - Caitlin Bowman - Turnbull Hill Lawyers

Having a solid understanding of building contracts in NSW is crucial for both builders and homeowners. The Home Building Act 1989 (the Act) requires that for any residential building work exceeding a value of $20,000, a contract must be entered into between the parties. A building contract serves as a legally binding agreement that safeguards the interests of all parties involved.

Did you know that nine out of ten projects experience cost overrun?

The purpose of this guide is to provide you with valuable insights on entering into a building contract including fundamental aspects of building contracts, factors to consider and possibly negotiate when entering into a building contract, common issues that can arise, and the rights and obligations of parties.

Why do I need a building contract?

A building contract is essential for several reasons. Firstly, it should provide a clear and concise outline of the work to be done, including specifics like materials and the project timeline. This can prevent misunderstandings and disputes down the line. It also outlines payment terms, including when payments are due, which can protect you from unexpected expenses.

It also assigns responsibilities. The contract will make clear who is responsible for things like council approvals, site prep, and inspections. So, if something goes wrong, you know who is liable.

Additionally, it often includes clauses that cover delays or changes in the project, as well as recourse for a breach of the contract by either party.

Types of building contracts in NSW

There are four common types of building contract in NSW:

  1. Lump sum contract (also known as a ‘fixed price’ or ‘stipulated sum’ contract):
    • This type of contract is the most popular and sets one determined price for all the work for the project.
    • Used to avoid the change of orders (outlines changes to the scope of the work), for any additional or undetermined work, which would allow the price for the project and the timeframe to be amended.
    • Often includes clauses on ‘liquidated damages’, which apply penalties for a job that is completed late, to incentivise the builder to complete within the project timeframe (however builders will at times remove these clauses).
  2. Unit price contract:
    • Typically emphasises the types of tasks being carried out in addition to the materials used.
    • Allows for easier comprehension of each cost due to categorised style of pricing.
    • Easy to evaluate costs of different categories and to adjust the price if the scope changes.
    • Final cost is not defined when parties enter into the contract.
    • Not typically used for major construction projects and is more often used for smaller jobs like repairs or maintenance work.
  3. Cost-plus contract:
    • This contract normally requires the owner to pay for all project expenses including materials, labour, and any other project costs. As well as an agreed amount to cover the builder’s overhead costs.
    • Using this type of contract will generally lead to a project being completed as the owner envisioned, particularly if they have very specific requests or requirements
  4. Time and materials contract:
    • Requires owners to pay for all project costs and an agreed-upon hourly or daily rate, which is defined in the contract.
    • Allows builders to not be completely limited by budget.
    • Often includes caps on costs.
    • An issue with this type of contract is the project can go over scope, and it can be difficult to estimate the final cost.

General conditions in a construction contract

A building contract typically contains standard clauses that outline the key aspects of a project. Including but not limited to:

  • the builder’s scope of work,
  • project specifics
  • compliance with laws and regulations
  • personnel and material requirements,
  • owner’s inspection rights
  • procedures for project delays
  • warranties
  • insurance requirements
  • dispute resolution and termination procedures

The main features of these clauses are:

  • Scope of work – defines the scope of work to be performed by the contractor. Specifies the project location, key deliverables, timeline, etc.
  • Price/payment terms – specifies the total contract price if known and payment terms, including any retention, milestones, invoicing procedures, etc.
  • Changes – allows changes/variations to the scope of work via change orders, including impact on price/schedule, and specifies the procedure.
  • Delays – addresses excusable project delays, procedures for time extensions, and any related compensation.
  • Termination – allows either party to terminate the contract under defined circumstances, like material breach, and specifies the termination procedures. This is perhaps one of the most important clauses in a contract.

Building contract dispute resolution

When navigating a building contract dispute, it is crucial to maintain open communication with the other party. Communication breakdown can hinder reaching a resolution. Additionally, property owners must inform their insurers in writing once any defect or incomplete work is discovered.

In addition to the above, steps that can be taken in a dispute resolution are:

  1. Talk about it – discuss the problem as soon as it arises to prevent misunderstandings from escalating.
  2. Write a letter – confirm the discussion and any agreements in writing and provide a copy to the other party.
  3. Mediation – bring in an impartial third party to facilitate conversation and help guide the parties to a mutually agreeable solution. This option is more useful in a dispute involving disagreements regarding payments, an increase in price, or a variation to the timeline. Over 80% of disputes voluntarily submitted to mediation are resolved.
  4. Contact Fair Trading – if the dispute involves an alleged project defect and cannot be resolved between the parties, Fair Trading can assist. Either party may contact Fair Trading, but both need to be agreeable to contacting them.
  5. Building inspections – a Fair Trading inspector can help parties resolve disputes over major defects. Non-major defects are handled by the Issue Resolution and Advisory Services team. If this does not resolve the dispute, it can be brought before the NSW Civil and Administrative Tribunal.
  6. Litigation – if all else fails, consider litigation, which will provide a final decision. However, this method can be very costly and should be seen as a last resort for parties. 

It is important that from the start of this process, both parties should keep up-to-date and accurate records to protect their rights. Additionally, you should familiarise yourself with your contract and its dispute resolution clauses, as often this will stipulate how a dispute should be handled.

The bottom line

The bottom line is a good building contract reduces miscommunication and establishes legal protections for all parties involved. For all building projects big or small, a building contract is an essential part of the process.

Turnbull Hill Lawyers have over 50 years of experience working with individuals across Australia and can provide detailed advice regarding your rights and obligations when entering into a building contract, as well as drafting first-rate building contracts tailored to your project’s requirements.

Call us today!

Looking to embark on a construction project? Needing advice on how to terminate your construction contract? Or need assistance with a dispute in relation to a building contract? Contact us today to speak with one of our experienced commercial solicitors.

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