Comments on the Standard Form Home Building Contracts

The Standard Form Home Building Contracts...........................................................................

Peculiar Aspects of Home Building Contracts to be Kept in Mind...........................................

Home Building Contract Documents...........................................................................................

Some Questions You Should Ask When Advising on a Home Building Contract..................

The Approach to Analysing Home Building Contracts..............................................................

Cost Plus Contracts......................................................................................................................

Basic Structure Of A Cost Plus Contract....................................................................................

Master Builders Association Cost Plus Contract CPC Residential..............................................

Housing Industry Association Cost Plus Contract.......................................................................

Lump Sum Contracts..................................................................................................................

Deficient Notice of Default Provisions in Home Building Contracts..........................................

AMENDMENTS TO THE STANDARD FORM HOME BUILDING CONTRACTS

The Office of Fair Trading Home Building Contract.........................................................

The Master Builders Association BC 4.......................................................................................

The Housing Industry Association NSW Residential Building Contract for New Dwellings.....

The ABIC SW-2008-HNSW Contract

THE STANDARD FORM HOME BUILDING CONTRACTS

The standard home building contracts in most frequent use in New South Wales are:

The Housing Industry Association Cost Plus Contract

The Master Builders Association CPC Residential Cost Plus Contract

The Office of Fair Trading Home-Building Contract,

The Master Builders Association BC 4,

The Housing Industry Association Plain English Contract,

The Housing Industry Association Contract for Renovations and Additions.

These contracts are amended from time to time. This means that some of the comments below may relate to superseded versions. Check carefully to see if the comments are appropriate to the version before you before using any or the suggested special condition.

Contracts Involving a Supervising Architect

These contracts are all designed for small scale building projects where there is no supervising architect. Where there is a supervising architect a contract specially drafted for that situation should be used such as the ABIC SW-2008-HNSW Contract put out by the Royal Australian Institute of Architects.

Peculiar Aspects of Home Building Contracts to be Kept in Mind
  1. A home building contract is a contract to create a new thing and not to sell an existing thing. It is thus inherently riskier than a contract for the sale of land or of an already existing thing or commodity

  2. A home building contract requires a high degree of cooperation between the parties.

  3. In home building contracts some degree of dissatisfaction and disappointment are almost inevitable because, as an old Builder's Licensing Board inspector once said to me: "The problem is that the owner is buying a dream and the poor old builder is just building a house." Very seldom does the resulting construction completely satisfy the owners' emotional expectations even with the best of builders.

  4. A home building contract is usually paid for by progress payments but the ordinary owner is not able to assess the value of the work done that is the subject of a progress payment and has no ability to judge the quality of building works.

  5. In home building contracts the builder's obligation is to provide a satisfactory building at handover time. Within reason, any defect which he can conveniently rectify at a later stage in the job should not be seen as a breach justifying the owner's refusal to pay a progress payment as the builder should have a free hand to deal with such problems as it suits his own schedule, so long as he produces a satisfactory result at the end and within the required time. On the other hand there are times where, if the builder proceeds with the work without rectifying the defect, the defect becomes “built in” and unreasonably expensive to rectify. This has occurred for example where an error in setting out has resulted in an undersized slab. Some builders, instead of biting the bullet and removing the slab and replacing it with a correct sized slab, rush to construct a frame and lay bricks on the undersized slab such that the expense of replacing the slab becomes prohibitive. It appears that the builder has been advised to do this because, in the past, Courts and Tribunals have been reluctant to make an award of damages which contemplates the demolition of a fully built house

  6. The Home Building Act 1989 ("the Act") provides that the following statutory warranties are implied into every contract to do residential building work:

    18B Warranties as to residential building work

    The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work:

    1. a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract,
    2. a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new,
    3. a warranty that the work will be done in accordance with, and will comply with, this or any other law,
    4. a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,
    5. a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling,
    6. a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder's or person's skill and judgment.

    The Act also provides:

    18G Warranties may not be excluded

    A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.

    These warranties pass with the land to subsequent purchasers and are subject to various limitation periods depending on when the house was completed or the contract entered into.

  7. Home Owners Warranty Insurance. The owners in home building contracts have the dubious advantage that they are covered by Home Owners Warranty Insurance. Section 92 of the Home Building Act 1989 requires that the builder must take out Home Owners Warranty Insurance to a value of $340,000.00 (from 1 February 2012) to insure:

    1. a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and
    2. a person on whose behalf the work is being done and the person's successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor:

      (i) to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or

      (ii) to have the contractor rectify any such breach.

    Unfortunately this insurance coverage is subject to the qualification that the insurer need not meet a claim unless the builder is insolvent, dead or has disappeared. Insolvency however, as defined in the Act, includes a failure by the builder to pay a money award made by the Consumer Trader and Tenancy Tribunal (now NCAT.)

  8. The Act provides for a cooling off period in relation to home building contracts

  9. The Act imposes strict requirements as to the form and content of home building contracts (All the standard forms discussed in these notes comply with these requirements)

  10. The Regulations under the Act provide that the work must comply with the Building Code of Australia

Home Building Contract Documents

The usual contract documents comprising a home building contract are:-

  1. The Contract
  2. The Plans
  3. The Quotation
  4. The Local Government Building Approval.

Some Questions You Should Ask Yourself Before Entering Into A Home Building Contract

Title: Do you own the land? Are there any easements, rights of way, stock routes or RTA affectations which might affect what you build and where? Some contracts require the owners to prove ownership of the land. If so you should annex proof of ownership (e.g. a copy of the Certificate of Title) to the contract. Proof of ownership is often required by home building contracts before the builder is required to commence building and failure to provide the proof may be a breach of the contract.

Site Problems: Have you checked the site for reactive soil, fill, landslip potential, rocky outcrops requiring removal, watercourses and springs that might affect building works and for features such as cliffs or gullies that will affect access for builders or occupants? To prevent the builder claiming extra costs for unusual site conditions which an ordinary site inspection should have revealed to him, insert a term to the effect that:- "The builder is deemed to have visited the site before contracting and to have made himself aware of all site conditions perceivable by visual inspection."

Is the Site Contaminated? Are there structures on site containing asbestos or is the soil contaminated in any way so as to require remediation?

All Weather Access to Land: Does the contract require the owner to provide the builder with all weather access to the land? If the builder has to provide this access it will be at the owner's expense and will be an additional charge. In the case of some sites this could be very costly. I recommend the insertion in the contract of a statement that:-"The builder has visited the site and warrants that all weather access of the type referred to will cost $................"

Availability of Services: Are water, gas, electricity or sewage available to the site? Does the house have to be constructed to a certain level to enable gravity discharge to the sewer? Will the owner have to pay for headworks for the supply of any of these services?

Development Approvals: What are the council's usual requirements? Can the you afford to meet them?

The Building Approval: Does the building approval require any additional construction or works not included in the builder's quotation? Get the builder to amend the quotation and specifically include the additional work and give a cost for it. Annex the building approval to the contract.

The Approved Plans: Are the plans which are the basis of the quotation and the contract the approved plans? Are they are identified in the contract?

Funding: Have you got the funds to pay for the works or are the funds guaranteed? Some contracts require that the builder be given proof that the owners have the funds before the builder is required to commence building. Failure to provide that proof may be a breach. Annex proof that you have the funds (e.g. copy of a letter from the finance provider) to the contract.

Finance Providers: Remember that the terms of the contract must be acceptable to the finance providers. Find out what their wishes are with respect to contract terms such as progress claims before you sign the contract as their requirements may differ from the standard terms and conditions.

The Quotation Should Cover the Whole Project: Is all the work to be done clearly set out in the plans and specifications? If not ensure that the additional matters are referred to in the quotation. Annex the quotation to the contract.

Omissions from Quotation: Does the quotation exclude any part of the works? Sometimes the builder omits to include necessary works in his quotation and then seeks to claim for them later as extras. Insert the following:-"Except where an express exclusion has been made herein, the Contract Price includes all matters that could be reasonably necessary for the completion of the works covered by the agreement and the plans."

Owners in Residence: Will you be residing in the premises whilst the building work is going on? Where the owners are to be in residence during construction or alterations most of the standard building contracts are not applicable since they contemplate the builder having exclusive possession of the site. For example, in most of the standard building contracts the owner's entry into occupation of any part of the premises releases the builder from his or her obligation to progress the works to practical completion. There are contracts specially designed for in residence construction, such as the Housing Industry Association Contract for Renovations and Additions, and these should be used, with appropriate modifications.

Builder's Licence: Does the builder hold the appropriate licence? Visit the Office of Fair Trading website to check that the builder's licence matches the name on the contract, matches the name on the certificate of insurance, entitles him or her to do the building work contemplated, and is current, how long he or she has been licensed, whether there has been any disciplinary action taken against him or her by the Office and whether there are any current complaints against him or her being investigated by the Office.

Exhibition Homes: Have the owners seen an exhibition home or other houses built by the builder? The owners should, if possible, examine an exhibition home or other examples of the work of the builder prior to deciding to engage him. If they find the exhibition home satisfactory and engage the builder on the strength of it they will naturally expect a home of a matching high standard.

Section 9 (3) of the Home Building Act 1989 provides that if an owner enters into a home building contract with a licensed builder to build a home similar to the builder's exhibition home, and the license holder knows that it was entered into after the owner inspected the home, and the contract in any way identifies the dwelling to be built by reference to the home, then the contract is to be taken to contain a provision that the dwelling will be constructed according to the same plans and specifications, standards of workmanship and quality of materials as the exhibition home, except to the extent (if any) that the contract and its accompanying plans and specifications provide for any departure from them.

Some builders, perhaps to avoid the effects of this provision, will give a different name to the house model in the contract to that which the owners inspected. For example the contract will refer to a "Cholmondley", instead of what the owner inspected which was a "Beauchamp" (I hasten to add that I know of no home builders which use these names), and there are no examples of the "Cholmondley" built in Australia. This appears to be for the purpose of ensuring that there is no model in Australia which might be used for comparison.

The solution is to amend the contract to refer to the actual model inspected by the owners: “The house is to be constructed to the same specifications, standards of workmanship and quality of materials as the builder's display home which the owners inspected at ..............(address)” This incorporates the all important terms as to quality, even though the plans may differ.

Whether the Plans Are to Be Provided by the Builder or the Owners: If plans are to be provided by the builder the contract should provide that:- "The builder warrants that the Plans are accurate and correct in every way and not in breach of copyright and that any delay arising from inaccuracy or incorrectness in the Plans and Specifications or from a breach of copyright will not entitle the builder to an extension of time or an additional payment and that any variations so arising will be at the builder's cost.”

Variations: What is the profit percentage charge for variations? The charge for variations is generally cost plus a percentage (which should not exceed 20%). Variations are very costly. You should discuss and go over the plans very carefully many times and make all necessary amendments before contracting to avoid the need for any variations.

Provisional Sums and Prime Cost Items: Are Provisional and PC sums clearly set out? Are they warranted to be reasonable estimates based on current costs? I suggest you insert a term as follows:-"Where the provisional sums are included in the Contract Price the Contractor warrants that those sums are reasonable estimates based on costs current at the time of contracting".

Profit Margin: Is the builder's profit margin on increases of provisional items reasonable? (i.e. between 10% and 20% of the cost)

Deposit: Is the deposit within the legal limit? (The Home Building Act sets limits on the amount of deposit that can be required under the contract of not more than 10% if the contract price is under $20,000.00, if over that sum then not more than 5 %.)

The Commencement Date and the Completion Date: Are they clearly set out?

Progress Payments: If progress payments are milestone payments e.g. specific sums payable on the achievement of certain stages such as completion of slab, completion of frame etc, do the sums reflect the value of work done to that stage. Insert the following:- "The Contractor warrants that the Progress Payments set out herein equate to the value of the work done at that stage of the Building Works."

Failure to Pay Progress Payments: This problem might be dealt with as follows:-"Notwithstanding anything herein contained, failure to pay progress payments shall not constitute a breach of contract nor shall it entitle the builder to determine the contract where within the time for making such a payment the owner deposits the disputed sum into an interest bearing account in the joint names of himself and the builder and from which money cannot be withdrawn without the consent of both parties and gives the builder notice in writing of his reasons for doing so." Even where the contract already requires the money to be in such a joint account prior to commencement of works, this clause is, I believe, still is necessary.

Variation Procedure: Does the Owner understand the procedure for variations (in writing and costed before being done) and is the margin for variations reasonable? (between 15% to 20% of cost).

Extension of Time Procedure: Does the owner understand the procedure for extension of time?

Dispute Resolution Procedure: Is the dispute resolution procedure fair? If the parties agree to arbitrate, is the arbitrator or expert to be chosen by an independent person such as the President of the NSW Chapter of the Institute of Arbitrators and Mediators Australia or by the President of the builder's own association (not recommended)?

Liquidated Damages: Is there a liquidated damages clause? There should be. Even if there is, it may be deliberately drafted to be ineffective. For example the latest MBA BC4 contract provides for liquidated damages all right, but they says that the liquidated damages cannot be deducted until Practical Completion has been achieved. If the final progress claim is a small one, which it usually is, that means there will be insufficient money to withhold to satisfy the Owner's rights to liquidated damages. That effectively deprives the Owner of the benefit of the liquidated damages clause. By way of further example, the HIA contracts provide for liquidated damages but say that if the rate of liquidated damages is not inserted in the contract then the rate shall be $1.00 per day

To select an appropriate rate of liquidated damages:-

  1. If you are living in rented accommodation or will be if the house is not completed on time then find out the notice period on the accommodation and insert that as the minimum unit of time and the rent for that period as the rate of liquidated damages e.g.:- ".$......for each and every (week/month) or part thereof after the period shown in Clause 5......". if the homeowner is paying for storage of their furniture etc that
  2. If you are not renting then fix a daily rate based on the interest you will be paying on your building finance. If you are not renting or paying interest then apply the short term money market rate to the monies you will invest in the project. Remember, liquidated damages need only be a rough approximation of the anticipated losses.

Practical Completion: Are the requirements for practical completion clearly set out? In the past, some builders have served Notices of Practical Completion before the site has been cleared of building material and rubbish. I recommend an additional term as follows:-"A Notice of Practical Completion cannot be validly served under this agreement until all rubbish and surplus material has been removed from the site."

The Housing Industry Association NSW Residential Building Contract for New Dwellings, and the Master Builders Association BC 4, both have drafting problems in their sections dealing with Practical Completion in that no provision is made for a time by which the builder should have completed minor defects and omissions. I recommend an additional term as follows:-"Within 7 business days of the service of the Notice of Practical Completion the owner may give the builder a notice of those things still required by the contract to be completed and the builder shall complete those items within the following ... days."

The Approach to Analysing Home Building Contracts

In any home building project there are going to be risks. Think of the major risks that arise in a home building contract:

  1. the risk that the builder may have underestimated his costs and underpriced the job,
  2. the risk that the work may not be completed in the time provided for in the contract
  3. the risk that the work may be defective and require expensive rectification
  4. the risk that the work will not conform to the plans or specifications.

The question arises who is going to bear a given risk? The building contract acts as a formula for allocating those risks between the parties.

The golden rule of contractual risk allocation is that the party who should bear the risk of an event occurring is the party who is in the best position to avoid that event occurring

COST PLUS CONTRACTS - WARNING

The first two contracts I have listed:

the Housing Industry Association Cost Plus Contract

the Master Builders Association CPC Residential Cost Plus Contract

are Cost Plus Home Building Contracts.

I have listed these Cost Plus contracts first, not because they are the most used, but because they are the most dangerous. In some situations, such as where there builder's task is to rectify defective work or complete incomplete work performed by another builder, Cost Plus contracts are unavoidable, because the builder may find that there is additional work to be done as he opens up the existing work, and a lump sum contract would give rise to arguments about whether the performance of the additional work was a variation or not. Try to avoid entering into a Cost Plus Home Building Contract when there are no such complications.

The reason you should not enter into a Cost Plus Home Building Contract is that, in every important aspect, the Cost Plus contracts breach the golden rule of contractual risk allocation.

Basic Structure of a Cost Plus Contract

A Cost Plus contract is one where, under it, the parties agree that the builder is to be paid the cost of the work done plus a profit percentage. It is usually preceded by an "estimate" produced by the builder. In my experience this "estimate" is seldom, if ever, included in the contract. That "estimate" is usually a very low one. Often the builder tenders to do the work for a much higher fixed-price contract and persuades the owners to enter into the Cost Plus contract on the basis that "it will be much cheaper this way." In my experience it never turns out to be so.

Let us look at the contract to see what you are getting into if you sign one of these.

MASTER BUILDERS ASSOCIATION COST PLUS CONTRACT CPC RESIDENTIAL

The Risk That the Builder May Have Underestimated His Costs and Underpriced the Job

Schedule 1 of the Master Builders Association Cost Plus Contract provides that among the costs which the builder is entitled to claim are:

  • all wages and other entitlements payable to the builder's employees or payable by reason of such employment...
  • the builder's own work....,
  • costs of any services ....
  • costs of all trade contractors.....
  • cost of hired equipment ....
  • cost for the use of plant and equipment belonging to the builder....
  • the cost of correcting modifying or changing work already completed, which is changed by reason of a variation by the Owner, or which is defective for reasons other than due to materials provided by the Builder or the workmanship of the Builder.
  • the cost of complying with any site specific issues such as safety and pollution and waste disposal......
  • any other costs or expenses which the builder is liable for or incurs by reason of carrying out the work including insurance costs......

The essential thing to realise is that every one of these costs, which could be greater or lesser according to the approach and conduct of the builder, will not be borne by the builder. Indeed if the builder is careless and, as a result, these costs increase, the builder will be rewarded for his carelessness by an equivalent increase in his profit, as any increase in the cost of the works is going to increase what he is paid as a percentage of that cost. The structure of the contract is also almost an open invitation to fraud in that the builder can exaggerate the hours which he or his employees have spent on the job and unless the owners have someone observing the site at all times, it will be impossible to prove that the hours claimed were not spent on site. I have known of unscrupulous builders arranging for the labour on projects of their own to be entirely paid for by the owners of another site in this way. Even if the builder is not so unscrupulous, he is unlikely to be driving his workers as it is not to his commercial advantage to do so.

With respect to the builder's optimistic estimates of cost, Clause 3(d) provides that:

Contract Represents Entire Agreement

(d) Apart from any terms implied by Statute, the whole of the terms, conditions and warranties of this Contract are set out in the Contract, drawings and specifications (as per Schedule 3) and will not and are not in any way varied or affected by reference to any prior negotiations, stipulations or agreement, whether written or verbal.

What this means is that all the optimistic estimates of costs, and the things that the builder said about the ultimate cost of the works, are not part of the contract.

The Risk That the Work May Not Be Completed in the Time Provided for in the Contract

The latest version of this contract published in December 2012 now does provide for liquidated damages described as "Delay Costs" in clause 10(e). Unfortunately the way the clause is drafted makes it ineffective. For example the latest contract provides for liquidated damages being payable to the homeowners all right, but it then says that the liquidated damages cannot be deducted until Practical Completion has been achieved. There is a further problem with such clauses in that they give rise to the argument that, if there is a liquidated damages clause which even only provides for damages of one dollar per day, it has the effect of preventing the owners from claiming delay damages under the statutory warranties.

The clause then provides that, if "nil" is inserted or nothing is inserted in the schedule fixing a rate for liquidated damages, "then it is agreed that no damages are payable in relation to the time to complete the works." It is a serious question as to whether those words breach section 18G of the Home Building Act 1989 which prevents contracting out of the statutory warranties.

(It should be noted that, in the schedule this item is presented exactly the same as the item dealing with builder's rights to claim for delays. I have seen contracts filled out with nil in both items in the schedule giving an impression of even handedness, but when one looks at the relevant clause dealing with the builder's situation ,clause 11(f), that clause provides that if no amount is specified on the schedule, then the actual cost of the delay will be payable. Filling out the schedule in this way has about the same degree of even handedness as "Heads I win, tails you lose". ) If the final progress claim is a small one, which it usually is, that means there will be insufficient money to satisfy the Owner's rights to liquidated damages. That effectively deprives the homeowners of the benefits of the liquidated damages clause.

The practical effect of that is to deprive the homeowners of any benefit they could obtain from the liquidated damages which are “liquidated” – that is, given a fixed money value, so that they can be deducted from the contract sum before it is paid.

I recommend a clause something along these lines:

Should the contractor fail to complete the works in the completion period(or by the date for practical completion) as provided for in the contract, the owner shall become entitled to liquidated damages of $[amount] per day or part thereof until the works are completed, which money may be deducted by the owner from progress payments as they fall due and to the extent that such liquidated damages are unpaid, the contract price shall be reduced, and, to the extent that such damages exceed the balance of the contract sum payable, they shall be a debt recoverable by the owner against the contractor.

The Risk That the Work May Be Defective and Require Expensive Rectification

If you look at paragraph (g) of Schedule 1 you will see that the Builder, under the Contract, is entitled to recover the whole cost of rectifying defective work even if that defective work was performed by the builder's sub contractors or employees under his control. The only exception is where the work was physically performed by the builder himself. With regard to liability for subcontractors, this is an attempt at sidestepping the statutory warranties imposed by section 18B of the Act. Eventually, after consideration by a Court or Tribunal, the clause may fall foul of the prohibition in section 18G, but the drafting gives the builder a considerable bargaining and tactical advantage.

The Risk That the Work Will Not Conform to the Plans Or Specifications

A careful reading of paragraph (g) of Schedule 1 will show that the builder is in a position to argue that the cost of correcting works which have not been built in accordance with plan must also be borne by the owner even if the failure to comply with plan was the fault of the builder. This is again an attempt at sidestepping the statutory warranties imposed by section 18B of the Act. Eventually, again after consideration by a Court or Tribunal, the clause may fall foul of the prohibition in section 18G, but the drafting gives the builder a considerable bargaining and tactical advantage.

Summary of the Master Builders Association Cost Plus Contract

The Master Builders Association and Cost Plus Contract is a contract in which the builder has absolutely no incentive to complete the work in accordance with the plans, or free of defects, or on budget or on time because he suffers no loss if he fails to do so. Indeed if he goes over budget he profits from it. DO NOT ENTER INTO SUCH A CONTRACT.

HOUSING INDUSTRY ASSOCIATION COST PLUS CONTRACT

Let us look at Schedule 2 of the Housing Industry Association Cost Plus Contract.

The Risk That the Builder May Have Underestimated His Costs and Underpriced the Job

If you carefully read that schedule you will see that it has all of the problems that we discussed in the Master Builders Cost Plus Contract. It is perhaps not as well drafted. Otherwise the only difference between the Housing Industry Association Cost Plus Contract and the Master Builders Association Cost Plus Contract is that in the Housing Industry Association Contract there is no Entire Agreement clause. That was probably just another drafting error.

The Risk That the Work May Not Be Completed in the Time Provided for in the Contract

With respect to the builder's estimates of time, there is again no liquidated damages clause in this contract. Although the statutory warranties give an owner a right to sue if the time taken is greater than the contract time or a reasonable time if no contract time exists, until a court decides that issue, the owner must still pay the builder in full and cannot deduct anything for delays.

The Risk That the Work May Be Defective and Require Expensive Rectification

If you look at paragraph (g) of Schedule 1 you will see that essentially the Owners must pay for everything including the cost to rectify defects. There appears to be a drafting error in that it may have been intended in paragraph (g) to exclude, from costs payable by the owner, faulty materials and workmanship the responsibility of the builder when those costs are incurred during the defects liability period. Unfortunately as a result of a drafting or printing error the paragraph was left incomplete and it is not clear what was meant. There is definitely no concession that the builder must bear the costs of rectification of any defects if they are rectified during the construction period of the contract. Again, with regard to liability for defective work, this is an attempt at sidestepping the statutory warranties imposed by section 18B of the Act. Eventually, after consideration by a higher Court, the attempt may fall foul of the prohibition in section 18G, but the drafting gives the builder a considerable bargaining and tactical advantage.

The Risk That the Work Will Not Conform to the Plans Or Specifications

A careful reading of Schedule 1 will show that the builder is in a position to argue that any cost in connection with the works, including the cost of correcting works which have not been built in accordance with plan, must also be borne by the owner even if the failure to comply with plan was the fault of the builder. I SAY AGAIN DO NOT ENTER INTO SUCH A CONTRACT

It is for these reasons that section 13 of the Victorian Domestic Building Contracts Act bans cost plus contracts in new houses and regulates the use of such contracts in other situations. I have been agitating for some years for such a provision to be inserted into the New South Wales Home Building Act.

STANDARD FORM LUMP SUM CONTRACTS

The last four contracts I have listed:

  • the Office of Fair Trading Home-Building Contract,
  • the Housing Industry Association NSW Residential Building Contract for New Dwellings,
  • the Master Builders Association BC 4,
  • the Housing Industry Association Contract for Renovations and Additions;

are "Lump Sum Contracts" which means that under them the builder promises to complete the works set out in the contract for a specified Contract Price. THIS IS THE BEST TYPE OF BUILDING CONTRACT.

Let us look again at some of the risks that arise in a home building contract:

  • the risk that the builder may have underestimated his costs and underpriced the job,
  • the risk that the work may not be completed in the time provided for in the contract,
  • the risk that the work may be defective and require expensive rectification,
  • the risk that the work will not conform with the plans or specifications.

THE OFFICE OF FAIR TRADING HOME BUILDING CONTRACT

The Office of Fair Trading Home Building Contract is a good contract, but just because a contract has the imprimatur of the Office of Fair Trading does not mean that it is perfectly drafted nor that, if you use it in an unamended form, that the building project will be trouble free. Remember, this is just a standard form. It is how you use it that decides the effect it will have on your home building project.

Let us consider how it deals with the risks:

The Risk That the Builder May Have Underestimated His Costs and Underpriced the Job

The Office of Fair Trading Home Building Contract is a Lump Sum Contract which specifies a Contract Price. That does not however mean that under this contract the price for the works cannot increase. The marginal note on page 2 of the contract lists some of the things which may give rise to an increase in the Contract Price which are:

  • Increase in Taxes
  • Provisional Sums
  • Prime Cost Items
  • Variations
  • Interest on Overdue Payments
  • Boundary Survey.

Watch Out for Provisional Sums.

Often the contract involves the performance of work for which the builder is unable, or unwilling, to fix a price. Sometimes this is because the works may involve a need for rock breaking equipment during excavation or the need for piering down to bedrock when the ground will not support the works. In these circumstances a "provisional allowance" will be included in the contract price to provide for those works and if the allowance is inadequate to cover the cost of the work, the owner must pay more. That provisional allowance will almost invariably be the builder's own estimate. The contracts provide, however, that if that allowance is inadequate, not only will the owner have to pay the additional costs of the work but he will also have to pay a percentage of the additional cost (usually 15%) to the builder to cover profit and overheads.

The reason that the use of provisional sums should be avoided with regard to anything but excavation and piering is that, if too many items are made provisional, what you get is essentially a Cost Plus Contract. I have known builders to list, in a schedule of provisional sums, provisional allowances for everything such as:

  • the initial survey,
  • the excavation,
  • the piering,
  • the foundations,
  • the slab,
  • the frame,
  • the brickwork,
  • the gyprocking and internal fit out and
  • the tiling.

That is they have made almost all the contract works into provisional items and thereby insulated themselves from any risk of their estimates being wrong. This is simply a device to change a Lump Sum Contract into a Cost Plus Contract so that the builder does not have to bear the risk that his estimates of the cost of the works are wrong. Of this list only the excavation and the piering should be the subject of provisional allowances. The other items are relatively easily estimated and should be included in the fixed part of the lump sum.

Sometimes less scrupulous builders have, when competing for a building job, used this term to reduce the apparent contract price by underestimating the provisional items, knowing that the owner is obliged under the contract to pay the excess and to pay the builder a percentage of the excess into the bargain. The owner is almost invariably relying on the builder's skill and judgement in such matters and the contract should contain a term requiring that the builder's estimates be reasonable estimates based on current costs.

Only this contract, the Office of Fair Trading Home Building Contract, imposes such a term in clause 10 which reads as follows:

The contractor warrants that the provisional sums allowed have been estimated with reasonable care and skill and in the light of information necessary and available at the date of the contract and taking into account such factors as a competent and experienced contractor should have taken into account in estimating the provisional sums.

Deemed Inspection of the Site.

Sometimes in the middle of a project, a builder might seek an increase in price because he has not properly costed the job. For example if he quoted on building a house on flat ground and the site is sloping meaning a substantial increase in brickwork over the standard house. This is something which the owner could not have foreseen and which the builder should have made himself aware of by an inspection of the site. To avoid these problems a clause along the following lines is a good idea.

Before signing this agreement the contractor shall have inspected the site, its access and its surroundings and shall have:

  1. examined all information relevant to the risks and contingencies and other circumstances having an effect on this agreement and obtainable by making reasonable inquires; and
  2. examined all information made available in writing by the owner to the builder; and have used that information in the estimation of the cost of provisional items.

Neither the Housing Industry Association nor the Master Builders Association contracts have any such provision. I suggest that a term along these lines should be incorporated into all home building contracts.

"Front End Loading"

Another, related, way in which the contract may be used to unfairly impose on the owners is by the misuse of the progress payment schedule in clause 12. Progress payments are generally paid by way of "milestones", or stages, in the construction of the house, such as:

the excavation stage,

the piering stage,

the foundations stage,

the slab stage,

the frame stage,

the brickwork stage,

the lock up stage

the gyprocking and internal fit out stage and

the installation of kitchen and white goods (at practical completion).

The marginal note in Clause 12 says, inter alia, "Progress payments are usually made at specific stages as the work proceeds, These payments, which include GST, should equate to the value of the work done."

What sometimes happens is that the builder produces a progress payment schedule whereby the amounts to be paid for the work exceed the contract value of the work in all but the last progress payment. This is generally not apparent to the owners who have no experience in the relative value of stages of the building works. What then happens is that, towards the end of the job, the builder begins to lose interest in finishing as he knows that there is no more profit in the job for him. For example, there may be only $5,000.00 left to be paid but there may be $25,000.00 worth of work to do. The builder will often then cease work, particularly if there is no effective liquidated damages clause in the contract, and try to pressure the owners into agreeing to terminate the contract on the basis that he leaves them to complete the work and they do not pay him the last progress payment.

It is recommended that a special condition be inserted into the Office of Fair Trading Home-Building Contract along the lines of : "The Contractor warrants that the Progress Payments set out herein equate to the value of the work done at that stage of the Building Works."

The Risk That the Work May Not Be Completed in the Time Provided for in the Contract

The most significant fault with the Office of Fair Trading Home-Building Contract is that it does not provide for liquidated damages for delay by the builder.

The contract provides, in clause 9, that "the work will be done with due diligence and within the time stipulated in the contract, or if no time stipulated, within a reasonable time;" The contract also provides that the builder may seek extensions of time for such things as inclement weather, any order of a court or tribunal that the work be suspended unless the order resulted from the fault of the contractor; any act or omission of the owner; and any industrial dispute affecting the progress of the work (not being a dispute limited to the site or limited to employees of the contractor); the unavailability of materials necessary for the continuation of the work, unless due to the fault of the contractor; a variation to the work; a suspension of the work by a contractor under Clause 24; or any other matter, cause or thing beyond the control of the contractor, the contractor will be entitled to a reasonable extension of time to complete the work. The extension of time provision in clause 7 requires that the contractor claims extension of time within 10 business days.

All these provisions are provisions, the breach of which, in the other contracts, would allow the owner to claim liquidated damages. There is however no right to liquidated damages under the Office of Fair Trading Home-Building Contract.

It is recommended that a special condition be inserted into the Office of Fair Trading Home-Building Contract along the following lines:

Should the contractor fail to complete the works in the time for completion as provided for in clauses 6 and 7, the owner shall become entitled to liquidated damages of $[amount] per day or part thereof until the works are completed, which money may be deducted by the owner from progress payments as they fall due and to the extent that such liquidated damages are unpaid, the contract price shall be reduced, and, to the extent that such damages exceed the balance of the contract sum payable, they shall be a debt recoverable by the owner against the contractor.

The Risk That the Work May Be Defective and Require Expensive Rectification

The Office of Fair Trading Home-Building Contract provides in clause 23 that:

"The contractor must rectify omissions and defects in the work which become apparent within the period of 13 weeks from the date the work has been completed."

All the contracts provide for a defects liability period of 13 weeks. I was once told by a building inspector that most defects come to light in the first twelve weeks so this is probably just sufficient, but I personally would be more comfortable with 26 weeks.

NB This clause is not a bar. Even after the 13 week period the owner can require claim for defects under the consumer warranties implied by section 18B of the Home Building Act.

Clause 12 of the Office of Fair Trading Home-Building Contract, alone of all the contracts allows the owner to withhold, from a progress payment, an amount estimated by the owner, acting reasonably, which is equal to the owner's estimate of the value of the disputed item and provides that the contractor must still carry out its obligations under the contract pending resolution of the dispute.

The Risk That the Work Will Not Conform to the Plans or Specifications

Section 18B provides that there will be implied into every contract to do residential building work:

(a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract,

Other Clauses

Termination of the Contract : Clause 25 provides for termination of the contract by the owner.

Termination of a building contract must be done strictly in accordance with the terms of the contract. Every step of the ritual must be carried out exactly as the contract says it should. To do otherwise is tantamount to contractual suicide. The home building contracts generally provide for a notice of default whereby the aggrieved party notifies the other party that he or she (or it) is in default of the contract and that the contract may be terminated if the default is not remedied within the default period set out in the contract - usually ten business days.

A vexed question has been the level of detail required in such a notice and, where the notice complains of lack of due diligence in the builder, what level of activity over that ten business day period will be viewed as sufficient to remedy the breach. A recent decision of the Court of Appeal has helped to clarify what is a necessary and sufficient notice of default in this regard. That decision is Hometeam Constructions P/L v McCauley [2005] NSWCA 303. McColl AJ said that it was sufficient for the Notice of Default to simply assert, for example, that the builder had failed to proceed with the building works with due diligence. A reasonable recipient of the Notice of Default with knowledge of the history of the works would have had no difficulty in understanding that it was informing the appellant it had not been proceeding with the works with the diligence required by the Contract.

Further in Hometeam McColl AJ said that delay in progress during construction could amount to failure to perform the building works with due diligence if there was a failure to carry out a reasonable amount of work by a given time, measured by reference to all the work performed under the Contract or, in absolute terms, by reference to a lack of activity on the site over a significant period that could not be satisfactorily explained. Accordingly in order to establish that the Works, including the rectification work, had not been performed with due diligence, it was incumbent on the owner to call evidence to establish that, at the time the Notice of Default was served, the Works were seriously incomplete and there were no circumstances preventing the builder from having performed the Works at a more rapid rate.

Effect of Termination of the Building Contract by the Owner.

All of the Lump Sum building contracts provide that if the contract is terminated by the owner, then the owner is to complete the building work and, if the sum of the cost of completion plus the monies paid to the builder to the date of termination is greater than the contract price, then the builder must pay the owner the difference. If the sum of the cost of completion plus the monies paid to the builder to the date of termination is less than the contract price, then the owner must pay the builder the difference. This is very much to the builder's benefit since, even if the builder has repudiated the contract, he is entitled to the profit that the contract would have given him.

Deficient Notice of Default Provisions in Home Building Contracts

The legitimate expectations of home owners entering into home building contracts are that their projects will come in:

  1. On Time
  2. On Budget
  3. In Accordance with the Specifications, Plans and Drawings
  4. Free of Defects.

and that if these legitimate expectations are not met the contract will provide an effective remedy in terms of damages and enable the owner to take prompt action to protect his or her position.

Regrettably the current editions of the home building contracts proffered by the two builder's associations, the Housing Industry Association's NSW Residential Contract for New Dwellings and the Master Builders Association Head Contract for Residential Building (BC4), no longer provide an owner with a satisfactory remedy in that regard.

The most significant change which has occurred is in the notice of default provisions in which the grounds for which an owner can issue a notice of default have been significantly reduced in number from what they were in earlier versions of these contracts.

Notice of default provisions in a building contract enable an aggrieved party, such as a builder who has not been paid a progress claim, or an owner whose project has taken too long to complete, to serve a notice on the other party complaining of that default. The notice allows the other party the contractually agreed notice period (usually ten working days) to remedy the default specified in the notice. The sting in the tail of the notice is that if the recipient of the notice does not take reasonable steps to remedy the default in the time allowed, the aggrieved party could then serve a notice terminating the contract.

The provisions were necessary because at common law, in order to terminate the contract, an aggrieved party has to be able to show that the other party has repudiated the contract, that is, has shown by its conduct that it did not intend to carry out the contract at all. This is almost never the case in a building contract where the builder is taking too long to complete the works, because invariably the builder's intention is to carry out the contract, but as and when it suits him to do so. In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd Mason CJ said that there was a difference between evincing an intention to carry out a contract only if and when it suited the party to do so, and evincing an intention to carry it out as and when it suited the party to do it. He said that in the first case, the party intended not to carry the contract out at all, in the event that it did not suit him. Whereas in the second case, the party intended to carry out the contract, but only to carry it out as and when it suited him. It is only if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, that repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd.

The provision under the old HIA Standard Home Building Contract Edition 11 used to read:

The Owner may, subject to the following, end this agreement if the contractor:

  1. becomes bankrupt or executes a deed of assignment or arrangement or makes any composition for the benefit of creditors
  2. goes into liquidation, either voluntary or compulsory , or has a receiver or an official manager appointed; or,
  3. fails to proceed with the building works with all due diligence; or,
  4. fails to proceed with the building works in a competent and workmanlike manner; or,
  5. without reasonable case suspends the building work before practical completion; or,
  6. refuses of neglects to comply with any obligations under this agreement; or,
  7. fails to remove or remedy any defective work (as directed by the warranty insurer) within the time allowed.

The equivalent provision in the Master Builders Association BC4 used to read:

I. Determination by the Owner

  1. If the builder is in default in any of the following respects namely;
  1. if he commits an act of bankruptcy or executes a deed of assignment or deed of arrangement will makes an assignment of his estate for the benefit at his creditors or enters into a composition or with credit is or being a Company enters into liquidation whether voluntary or compulsory (except for the purpose of reconstruction); or

  2. if he fails to proceed with the works with due diligence or in a competent manner with regard to the circumstances of the contract works; or

    If without reasonable cause he wholly suspends the carrying out of the works before practical completion; or

  3. if he refuses or persistently neglects-

    1. to comply with the requirements of clause 12 of these conditions; or
    2. to remove or remedy defective work or improper materials, so that by the refusal or persistent neglect the works are materially affected; or
  4. if he states that he is unable or unwilling to complete the works or abandons the contract;

The current provisions of the HIA Standard Home Building Contract read as follows:

33.1 A substantial breach of this contract by the builder includes but is not limited to if the builder:

  1. has its licence cancelled;
  2. suspends the carrying out of the building works other than under Clause 32.

This causes a problem in that, where the builder has been guilty of delay, the owner must establish that the delay in question is a 'substantial breach'. The meaning of the term 'substantial breach' has not been judicially decided in this context but it is almost certain to mean a breach which would, at common law, constitute a repudiation justifying the other party ending the contract. It would seem that, in order to safely use this provision when the breach is that the builder has failed to proceed with due diligence, the owner must first allow the delay to extend to such lengths as would also constitute a repudiation at common law. That could be a very long delay necessary to raise the inference '..that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise..' Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at page 32

In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd, Mason CJ said:

4. The difference between a contract which contains a stipulated day for performance of an essential term and a contract which, expressly or impliedly, requires performance within a reasonable time is important when the question is whether, on failure to perform within the time limited by the contract, the innocent party is entitled to rescind. In the former case, a right to rescind arises at law when the stipulated day passes; in the latter, that right does not necessarily arise when the reasonable time expires but only when repudiation is clearly to be inferred from the circumstances in which the delay occurs. Delay will amount to repudiation if the defaulting party "evinces an intention no longer to be bound by the contract ... or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way": Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, at pp 625 626; Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at pp 33, 40. If the inference to be drawn from the circumstances is that the defaulting party intends to perform an essential promise after some minor delay, repudiation cannot be inferred; but if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd., at p 32.

Statutory implied warranties as to time and due diligence

Section 18B (d) of the Home Building Act 1989 provides a warranty in the following terms:

(d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,

Section 18G provides:

A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.

The current editions of the HIA have liquidated damages provisions which can operate to effectively deprive homeowners of their rights to recover losses caused by the builder’s delay.

Clause 30.1 of the HIA contract provides that if the building works do not reach practical completion by the end of the contract period the owner is entitled to liquidated damages at the rate stated in Item 13 of Schedule 1 of the contract. When you get to Item 13 however it provides that if nothing is stated, that is, if no rate is stated in the space provided, then liquidated damages will be at the rate of $1.00 per day.

Clause10(c)(I) of the MBA contract provides that if the building works do not reach practical completion by the end of the contract period the owner is entitled to liquidated damages at the rate stated in Item 6 of Schedule 2 of the contract. Clause 10(c)(iv) however provides that if 'nil' is inserted or no amount is specified in Item 6 "then it is agreed that no damages are payable in relation to the time to complete the works".

The proper function of a liquidated damages clause is to reimburse the homeowner for the cost of temporary accommodation and storage of effects if the builder fails to complete the works on time. These provisions seem directed to depriving the unwary owner of his or her rights to recover losses for delay and the contracts should be amended to prevent that.

Repudiation

When each party is in breach of an essential term or has conducted itself in a manner amounting to a repudiation, neither is ready and willing to perform; neither may terminate at common law or pursuant to a contractual term: Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 considered

It is not necessary, for repudiation of a contract, that the repudiator make plain that he will never perform his contractual obligations at all, as Deane and Dawson JJ pointed out in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623 at 658 659. There, Mason CJ said that there was a difference between evincing an intention to carry out a contract only if and when it suited the party to do so, and evincing an intention to carry it out as and when it suited the party to do it. He said that in the first case, the party intended not to carry the contract out at all, in the event that it did not suit him. Whereas in the second case, the party intended to carry out the contract, but only to carry it out as and when it suited him. Mason CJ said that it is easier to say of the first than the second case that a party has evinced an intention no longer to be bound by the contract, although ultimately the question whether a party is taken to have evinced such an intention is determined objectively: Laurinda 166 CLR at 634; see also 643 per Brennan J, and 666 per Gaudron J.

In Koompahtoo Local Aboriginal Land Council v Sanpine [2007] HCA 61; (2007) 241 ALR 88 at 101 [44] Gleeson CJ, Gummow, Heydon and Crennan JJ said that unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. They said: 'In contractual renunciation, actions may speak louder than words.' Their Honours held that it was important to classify whether the obligation with which there had been a failure to comply had been agreed by the contracting parties to be essential, or whether there had been a sufficiently serious breach of a non essential term enlivening the right to terminate: Koompahtoo 241 ALR at 101 [47] and 102 [49]. They held that the interests of justice were promoted by limiting the right to rescind the contracts (i.e. terminate for breach) to instances of serious and substantial breaches of contract: Koompahtoo 241 ALR at 104 [52].

22. There is a difference between evincing and intention to carry out a contract only if and when it suits the party to do so and evincing an intention to carry out a contract as and when it suits the party to do so. In the first case the party intends not to carry out the contract at all in the event that it does not suit him. In the second case the party intends to carry out the contract, but only to carry it out as and when it suits him. It is much easier to say of the first than of the second case that the party has evinced an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with his obligations and not in any other way. But the outcome in the second case will depend upon its particular circumstances, including the terms of the contract. In some situations the intention to carry out the contract as and when it suits the party may be taken to such lengths that it amounts to an intention to fulfil the contract only in a manner substantially inconsistent with party's obligations and not in any other way."

The NSW Office of Fair Trading Contract provides that upon the contractor failing to complete the contract works within the contract time as extended by proper extensions of time, the owner may terminate the contract. That provision avoids the owner having to wait until the contractor’s conduct is so extreme as to amount to either a “substantial breach or to show: “an intention to fulfil the contract only in a manner substantially inconsistent with party's obligations and not in any other way." That is the owner can terminate the contract before he has suffered too much damage. Even though the power to terminate must still be exercised reasonably this gives the owner sufficient protection from the possibility of a claim by the contractor that he has repudiated the contract.

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