Tread carefully when signing a building contract

Friday, 19th Nov 2010

renovation candidate

If you’ve never really been involved in building a new property before, building contracts can seem rather daunting. When it’s a new development of yours with so much at stake, it’s important to make sure you know exactly what you’re getting in to.

Generally speaking, most building contracts for single dwellings are regulated by various authorities in each state which gives you some peace of mind. But beware; that doesn’t mean every clause in the contract is fair, or even legally binding. There is also less regulation on larger projects. It’s common for building contracts to favour the builder so you need to make sure you fully understand the terms of the contract before signing on the dotted line.

Although there are many potential issues in a building contract you need to be aware of, here are a few of the most important ones to investigate:

Liquidated damages

This refers to the amount the builder will pay you if they exceed the timeframe specified in the contract for completion. Many builders are reluctant to include such clauses and often the figure specified can therefore be particularly low. It should simply be fair and reflect the cost to you of your extended holding costs and loss of rent because of the delay. Without doubt there will be clauses in the contract to protect the builder by charging you a high interest rate or penalty if you inhibit work progress, so it seems only fair to demand the same treatment in return.

Caveats over your property

Beware of contracts that allow the builder to lodge a caveat over the property if you default on making a payment. Essentially this allows the builder to place a freeze on your title which prevents you from selling the property, borrowing any monies against it, or even refinancing your loan. Some builders may not include this in the contract but present it to you as a separate agreement to circumvent laws which may prohibit them from doing so within a building contract.

Variations to the contract

This is one of the most common reasons why disputes happen and costs escalate astronomically. It is perfectly reasonable to allow for variations within a contract, but too often people do not understand what is and isn’t included in the contract hence the need for expensive variations to be made down the track. Some may also not realise that most builders charge a premium on each variation you request. So not only are you up for the actual cost of the requested change, but also a fee of usually 20% or more on each variation. Above all, have your solicitor look over the paperwork before you sign it and ignore any builder who tries to convince you this is unnecessary. A builder with nothing to hide and a solid reputation should have no issue with this reasonable request.