This is the third in our series of articles is aimed at explaining some of the basics about how building contracts work. This article will deal with payment mechanisms in your building contract.
In entering into any building contract, you should determine what payments you will need to make, and when. You will need to ensure that you have money available to meet all the payments when due, either from a finance facility, or your own funds. If you are unable to make a payment – whether part of the deposit or a progress payment, this can have serious consequences, such as a suspension of work by the builder or termination of your building contract.
Preparation of Plans Agreement
If you are intending to use your builder’s standard designed house, sometimes the first stage of engagement is the signing of a preparation of plans agreement (PPA) (also called a preliminary agreement). This is a contract between you and the builder, where the builder agrees to do certain works in order to adapt its plans to your site (to deal with things such as the orientation and shape of your block, what clearing and earthworks may be needed (if to be done by the builder), and the location of services (such as electricity, sewerage and water).
These works may include conducting a site inspection, undertaking a site survey, preparing design plans and specifications, arranging engineering drawings, preparing an estimate of building costs, and preparing the building contract. These investigations and the plans drawn up then allow the builder to price your build, taking into account those matters (but still subject to variation, including for latent conditions).
You agree to pay a set amount (or costs plus a margin) for these works, even if you decide not to proceed with that builder. You will usually not be able to use the builder’s plans for another builder, even if you have paid for them. If you are paying for other work, such as a site survey, you should clarify whether this will be available to you, even if you do not proceed with that builder.
Your payment for this work may be a single lump sum (in advance, or when the work is done) or by deposit and one or more payments.
The builder may agree that the PPA fees paid by you are included as part of the building contract price, and allocated towards the deposit. If this is the case, as the builder has already done that work, you are unlikely to be refunded any part of the PPA fees, even if the build does not proceed (for example, because a building permit does not issue, or you do not obtain finance (if the contract is conditional on finance).
When you sign a building contract, most builders will require that a deposit be paid before they commence any substantial work, and before they apply for a building permit or licence. This usually will be payable within a short time of signing the contract. As noted above, if you have a PPA, the PPA fees may be allocated towards the deposit. If so, you should make sure that this is clearly set out in the document.
With certain residential building contracts, most States impose limits on the size of the deposit. For example, in NSW for contracts above $5,000 the maximum deposit is 10%, in Victoria, South Australia and Queensland, for contacts above $20,000 the maximum deposit is 5%, and in WA for contracts between $7,500 and $500,000, the maximum deposit is 6.5%. There are some exceptions and conditions to these limits (eg in Queensland, it is different if 50% or more of the work is to be performed off-site), and different limits can apply to smaller jobs.
Please note, your contract will usually be binding on you when it is signed, even if you have not yet paid the deposit – and if you fail to pay the deposit, you may not be entitled to just walk away. Even if the contract is terminated by the Builder as a result of the failure to pay, you may be liable to the Builder for its costs to date (which may include a sales commission to the agent that signed you up to the contract, referral fees and costs of drawing up initial plans) together with its anticipated profit on the whole job. These costs and damages can exceed the amount of the deposit.
Once the building commences, you will be obliged to make progress payments towards the costs of the build. These payments may be either set by reference to a regular period (eg monthly) or by the stage that the building has reached (eg at slab down, plate height, roof cover, lock up, secondary finishing and practical completion).
If the payments are to be made periodically, they are likely to be different each month and should reflect the progress that has been made on the build. You should check that the contract ties the payments to progress and that there is a mechanism for assessing how much progress has been made.
If the payments are to be made by reference to the stage of the works, the contract will state either a fixed sum or a percentage of the price is due on the completion of the relevant stage.
Again most states provide that on certain building contracts the progress claims must reflect the proportion of the work done to the date of the claim. Some of them set out the percentages of the price that may be charged at each stage – again check your local rules. Even if not required by law, before signing the contract you should ensure the payment schedule properly reflects the work that will have been done by the time of payment.
If you have an architect or a superintendent acting for you, that person should be checking and certifying that the works are at the stage for which payment is claimed.
Sometimes your bank may have a certifier who determines whether the works have reached the required stage before advancing loan funds to pay the claim. If you do not have a representative, you should be checking the works personally.
While you may not be an expert, you should be able tell if the works are approximately at the relevant stage – and if warning bells are ringing, you can get an independent builder or superintendent in for advice.
Minor defects or omissions may not justify holding up a payment, and there may be items that are not finished in order to allow other works (which are part of a later stage) to be done first – for example, downpipes may not be installed at the roof cover stage, to allow for rendering or painting of walls before they are installed.
Costs plus Contracts
The builder will make regular claims for costs and margin on a Costs Plus Contract. Unlike fixed price contracts, the total price is not fixed but will reflect the costs incurred. Each claim should include a break-down of the costs incurred in the invoiced period and a schedule setting out the total costs to date and the amount that has been paid towards, together with the amount of the payment due.
It is recommended that the payment claim also include the builder’s estimate of costs to complete (so that you keep some control over costs, particularly if the estimate is increased at any stage). The payment claim should attach invoices from each subcontractor or supplier to support the claims. Again, the claim and attached invoices should not be taken as given, you or your representative should verify that the claimed works have been performed.
Builder asking for early payment
You should not need to make advance payments other than the deposit, unless they are set out in the contract in respect of particular items, and they are permitted by law. Depending on your state, and the size of your contract, this may be allowed, and may be reasonable if, for example, high-value bespoke items are being bought.
However, if a builder is asking you to make payments earlier than provided for in the contract, for example, to enable the release of materials from a supplier, or to ensure that a subcontractor stays on the job, this is a warning sign that things may be going wrong and the builder may be in financial trouble.
In that event, seek professional legal advice, as this can have serious consequences for your build, and you may end up paying for works that are never done or items that are never supplied (especially if the builder becomes insolvent).
Another warning – advance payments may not be covered by the statutory home builders insurance required by most states to cover owners for loss if their builder becomes insolvent.
Each State of Australia has different laws relating to building, and particularly constructing housing.
These articles do not deal with the nuances of each State’s laws and systems – and before signing a building contract, you should check that it complies with your State’s requirements.
Our Guest Contributor:
Thank you to Andrew Throssell, Partner at Hotchkin Hanley Lawyers for sharing his insights into building contract basics. Andrew has over 20 years experience in commercial transactions and disputes and has dealt with a large number of commercial, construction and property transactions, often acting for developers, builders, building owners and shopping centre owners.
His areas of practice include commercial, industrial and retail property sales and leasing transactions, partnerships and joint ventures, construction law, business sales and purchases, franchising, information technology and intellectual property. Andrew has extensive experience advising on contentious and complex transactions.
Please note that any information in this blog is purely general in nature and provided as a guide only. Different States and Territories around Australia have different rules and laws that apply to building contracts. Professional legal advice should always be obtained if in doubt as to any contracts or agreements you are signing.