Contractual Issues and Obligations Faced when Renovating a Residential Dwelling

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Pittman Construction

Management Consulting

123 Fake Street, Newcastle, NSW

Dear Sir/Madam,

Pittman Construction Management Consulting is pleased to be employed as your representative as you pursue your dream of creating your perfect home. Enclosed is details entailing the major points which should be considered when looking at the contractual issues and obligations faced when renovating a residential dwelling. This report is broken up into separate sub headings which explain the key and major considerations for your review. However, should you have any further queries, please do not hesitate to contact me at your convenience.

Introduction

A contract can be defined as, a written or spoken agreement, especially one concerning employment, sales, or tenancy, that is intended to be enforceable by law[1]. To simplify a construction contract for residential construction it can be said that the contract should comprise at least three separate sections and/or appendixes[2]. These are:

  1. The actual signed contract itself. This section is the legally binding document usually in line with Australian Standards or other legislation for residential construction contracts. This section sets out the role, rights and responsibilities of both parties entering into the agreement[3].
  2. The second section usually contains the specification. That is, a description of the works to be carried out, the items that are to be supplied and/or installed by the builder and the expectations in which these works are to be undertaken and when. This document is usually quite technical and it is advised that a professional such as an architect or construction consultant review this prior to agreement[4].
  3. Lastly, the drawings or plans of the proposal form the last section of the contract. These are can be prepared by either the client or the builder but like section 2 above, it is important for a professional to review these documents to ensure both parties are satisfied as to the agreed scope of works. These drawings should be approved by a professional building surveyor and carry their stamp of approval for both parties interests[5].

Further to the above, The DBCA (Domestic Building Contract Act) notes in significant detail what is to be included in a legal contract for major domestic building works[6]. Specifically, section 31 of this Act requires that a contract, at a minimum, incorporates the following important points[7]:

  • be written
  • provide a detailed and thorough description of the works to be undertaken
  • include plans, scope of works and specifications
  • state the addresses and names of the involved parties – the client and the builder
  • state the registration number of the builder
  • provide a start date of the works and, if the start date is not known, require the builder to do everything that is reasonably possible to ensure the work will start as soon as possible from the execution of the contract
  • state a date of practical completion
  • state a contract price.[8]

TheHome Building Act(NSW) notes a number of key conditions and warranties for all the possible contracts which can be used for residential building work[9]. This Act also provides that a contract to which the Act applies must be written and contain certain prescribed information and contract particulars and be executed and dated by the parties bound to it[10]. More importantly, theHome Building Actprovides that[11]:

  • Where aContract for Residential Building Workis not written or does not have an adequate description of the scope of works the builder is not entitled to damages or to enforce any other remedy in respect of a breach of the particular contract[12].
  • WhereHome Warranty Insuranceis required, a builder is not entitled to demand, request, or receive payment of any money or carry out residential building work unless a current policy of Home Warranty Insurance is in place and a copy of a Certificate of Currency in respect of that insurance has been provided to the home owner[13].

The Home Building Act also makes it illegal for a tradesperson to do any of the following work without a contractor licence (thus it is important to ensure the licence details of the person or company doing the works forms part of the building contract)[14]:

  • Residential building work where the total cost of labour and materials is more than $1,000.00,
  • Electrical wiring work,
  • Plumbing, draining and/or gas fitting work, and
  • Air conditioning and refrigeration work (except plug-in appliances)[15].

Key Contractual Considerations and Legislation

Given the requirements of the DBCA, only certain building contracts are suitable for domestic building work and construction[16]. The Master Builders Association and the Housing Industry Association market their own contracts, which are often used by builders who are members of either of these associations[17]. Also, the Royal Australian Institute of Architects, in conjunction with the Master Builders Association, has produced the ABIC suite of contracts, which have been adapted for domestic building work[18]. Any other form of contract offered by a builder should be reviewed in detail and carefully by a professional to ensure all components of the contract are legitimate[19]. It is important that consumers obtain legal advice from a specialist in the construction industry before signing any building contract[20]. The DBCA contains provisions that apply to allcontractsfor domestic building work. It contains more onerous provisions that apply to contracts for major domestic building work (which is relevant in this case due to the dollar value of the works proposed), being contracts for domestic building work with a value of more than $5,000, which is relevant in this particular instance[21]. The following sections are of particular importance to anyone entering into a residential building contract and particular attention should be paid to these[22]:

Section 8 of the DBCA implies that in allcontractsfor domestic building work the following warranties[23]:

  • the builder will carry out the work in a satisfactory and professional manner and in accordance with the plans, scope of works and specifications set out in the executed contract;
  • thematerialsused by the builder will be good, functional and suitable for the purpose for which they are used and, unless otherwise stated, those materials will be new;
  • the work will be carried out in compliance with all relevant laws and legal requirements, such as the Australian Standards;
  • the work will be carried out with care and skill of that by a professional and will be finished by the specified date noted in the executed contract;
  • the work will be suitable for residential occupation at completion; and
  • if the contract states a specific purpose for the works undertaken, then the works and the materials chosen will be fit for the purpose specified.[24]

The above is covered by home warranty insurance which should be supplied by the builder as these works are in excess of $12,000[25]. Interestingly, the warranties in question run with the land and therefore can be called upon by subsequent purchasers of the property for a period of 10 years from the date of the occupancy permit and are therefore paramount to any residential construction works and the subsequent contract used[26]. It is also important to note that a builder should not and cannot request or receive a deposit for more than 5% of the contract sum when the contract sum is $20,000 or in excess of this figure and/or 10% of the contract sum when the works are less than $20,000[27]. To avoid disagreement, it is best if this is noted in the contractual terms and conditions and not just verbally.

Section 15 of the DBCA act places limits on cost escalation clauses as a means of protection. Clauses like this are reasonably common in construction contractsand provide for an increase of the contract price in certain circumstances, such as variations in the building works, and delays caused by the owner[28]. It is important to note that a cost-escalation clause in a domestic building contract isto be considered voidand redundant unless the contract contains a notice in the prescribed form alerting the consumer to the effect of the clause and the consumer places their signature or initials next to each such clause in the contract[29]. If during the construction phase, a builder asks for additional finances to what has been allowed in the contract price (this may be due to a legitimate variation or because the builder has made an estimating error), the contract must be reviewed carefully before agreeing to payment. For example, a builder cannot demand more money because of wage increases or inflation and if this is a concern, a lump sum contract should be put into effect. Check all builders demands against the cost-escalation clauses that you signed or initialed at the time you signed the contract and be prepared to note the specific clause to the builder or the company involved.[30]

Two major issues that seem to arise in all building contracts, either residential or commercial are variations to the contract sum and requests for extensions of time for the completion date[31]. These two issues are often the fault of no one but should always be evaluated on a situation by situation case as sometimes the builder may be breaching the contract and taking advantage in order to increase costs and profit margin[32].

Variations to thecontractsum may arise at the request of either the client or the builder. For example, the client may change their minds as to what they want completed or the builder may find an unforeseen circumstance which increases the time and difficulty of a task[33]. A common occurrence is the discovery of hazardous materials such as asbestos which is both costly and time consuming. Should a builder request to vary the plans or specifications contained within the contract, then the builder must give the client or client’s representative written notice of the variation, note why they believe the variation is necessary for the project and note the time and cost it will take to complete the works for the clients review, comment and approval[34]. Unless a building surveyor requires a variation, a builder cannot carry out any variation without the signed writtenconsentof the consumer. The DBCA and most building contracts limit the circumstances in which a builder can request additional money for variations[35]. Consumers should familiarize themselves with the relevant contract provisions before agreeing to pay any additional money. Section 37 of the DBCA states that a builder is not entitled to recover any financial loss in relation to a variation unless they can positively establish that the particular variation is both necessary and could not have been reasonably foreseen by a construction professional at the time the contract sum was agreed[36]. If a client desires to change the works they should provide written notice to the builder requesting a variation along with a revised scope of works for the purpose of providing costs and programme implications. If the variation is of a very minor nature (i.e. it will not add more than 2% to the contract sum), the builder may carry out the variation. Regardless, it is always best practice to make a note of an approval or rejection of a variation in writing (for example, via email) to ensure a record of the cost and scope of works is in writing should a dispute arise. In all other circumstances the builder must give the consumer a notice stating whether the variation will require a variation to the building permit, whether it will result in any delays and an estimate of those delays, and an estimate of the cost of variation and its effect on the contract price[37]. A builder cannot proceed with a variation requested by the consumer unless the consumer accepts the builder’s notice by signing and returning it to the builder[38].

Major domestic construction contracts must note a specific date when the works are completed or the number of days required for the works to be completed. The majority of contracts will allow builders to claim an extension of time when the works has been delayed for certain reasons[39]. A mismanaged project may mean the builder or construction company may submit a number of claims requesting an extension of time towards the end of the project which should be carefully considered and reviewed in their context. The other party to the contract should carefully read and review the provisions in their contract dealing with delays and extensions of time[40]. Normally building contracts only permit extensions of time in certain circumstances that are beyond the builder’s control; for example, certain industrial disputes, delays by the consumer, and variations to the plans requested by the consumer.[41] Section 32 of the DBCA requires a builder to make allowances in the contract for inclement weather, public holidays, weekends, rostered days off and any other delays. These allowances must be exhausted by the builder before the builder is entitled to an extension to the completion date under the contract[42].

Almost all contracts in the construction industry makes provisions for liquidated damages if the works agreed in the contract are not completed by the contractual completion date. Liquidated damages are essentially an estimate of the daily or weeklycoststo the consumer of any delays to the completion of the work and act as a form of compensation[43]. These damages are normally calculated with reference to rental and finance costs. A builder is liable to pay liquidated damages if they are late in completing the work and such damages are normally deducted from the progress payments that are payable to the builder[44]. One should ensure that the contract allowance for liquidated damages is sufficient enough to cover all costs incurred if the project is delayed. Communicate regularly with the contracted builder about the progress of the works and discuss any concerns you have as soon as they arise[45]. A weekly progress report is a great tool to ensure works are on schedule and as written proof should liquidated damages need to be enforced[46].

Occupational, Health and Safety

Whilst many clients may overlook Occupational Health and Safety, it is an extremely important factor when selecting a competent builder and entering into a contract. Australian legislation such as the Work, Health and Safety Act 2011 and Government organizations such as WorkCover place a strong emphasis on the importance of OHS and make it illegal to perform unsafe practices when undertaking construction works[47]. When entering into a contract with a builder, it is important to request the builder provides there method statements for general construction and any particular dangerous activities (such as working at heights)[48]. On top of this, it is also imperative for the builder to have current insurances in place prior to performing any works. Certificates of Currency of the builder’s insurance should form a section of the contract to ensure the client is protected should something go wrong and someone is injured or property is damaged[49].

Further Information

Further to the legislation above, the type of actual contract chosen will depend on the size of the project[50]. This particular project is reasonably large in terms of dollar value and therefore thought should be given to what type of contract will be used on this project. For example, one could choose a lump sum contract, a design and build contract or a construction management type contract depending on what is trying to be achieved. This is the decision of the client[51].

The most common form of building contract in residential or commercial is the standard industry approved contract, which is governed by rules set out in the Domestic Building Contracts Act 1995[52]. These types of contracts are often produced by industry associations, such as the Master Builders Association, Housing Industry Association (HIA) and Australia Building Industry Contracts[53]. Whilst these contracts contain standard terms and conditions which comply with the Act, there is obviously room for negotiation between both the parties and certain amendments are expected and can be made[54]. The contracts contain space for the parties to insert information such as the final contract sum, practical completion, any excluded works or clarifications from both parties, outlining builder’s profit and overhead on variations and other similar items[55].

Another common type of contract used in residential construction is fixed-price or lump sum where, as the name suggests, the price of the contract is a fixed lump sum[56]. This is the most common type of contract used for domestic building works as, except for certain situations, all domestic building contracts must be fixed-price[57]. However, despite this, it is important to be aware that there are a number of different ways in which the contract price can be amended as previously mentioned through things such as variations or provisional costs[58].

Another contract alternative to the fixed-price contract or the standard industry approved contract is the ‘cost plus’ or construction management contract[59]. These contracts differ from the fixed-price (lump sum) contracts as, rather than agreeing to a fixed-price for the building works, the other party agrees to finance the builder’s costs for the project plus an agreed profit margin and any preliminaries or overheads encountered by the builder[60]. In other words, the price is the actual financial cost of the works plus the builder’s profit and overhead.

Lastly, another option is to have a domestic building contract drafted specifically for a project, which is referred to as a ‘custom option[61]. A related option is to modify an existing standard contract to suit the particular needs of the client or project. This can be done by drafting special conditions that override the general conditions and is also common in the construction industry[62].

Conclusion

Whilst completing a residential development can be extremely satisfying, it will no doubt bring great difficulty and stress due to the nature of the construction industry, especially unforeseen circumstances and difficult site conditions. Whilst it is important to have some leeway and be willing to drift slightly from your vision, it is also equally important to ensure a legally strong contract is in place to protect both parties should certain issues arise. Unfortunately the construction industry is often one of the areas where contract law comes into practice due to parties disputing costs, allowances and visions but with the above, you should now have a basic understanding of residential construction contracts to help you better understanding your rights, roles and responsibilities.


[1] Fernandez, K. Contract. www.pathos.com 2011.

[2] Lovegrove, K. Builders Guide to Contracts. www.lsclawyers.com.au/elibrary/book2 2012. Sydney

[3] Ibid.

[4] Lovegrove, K. Builders Guide to Contracts. www.lsclawyers.com.au/elibrary/book2 2012. Sydney

[5] ibid

[6] ibid

[7] ibid

[8] ibid

[9] ibid

[10] Lovegrove, K. Builders Guide to Contracts. www.lsclawyers.com.au/elibrary/book2 2012. Sydney

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] Roberts Legal. Home Building Law. www.robertslegal.com.au 2011. Adamstown

[16] Ibid.

[17] Fitzroy Legal Service. The Law Handbook: Building Contracts. http://www.lawhandbook.org.au/handbook/ch14s02s03.php 2013. Melbourne.

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Ibid.

[24] Fitzroy Legal Service. The Law Handbook: Building Contracts. http://www.lawhandbook.org.au/handbook/ch14s02s03.php 2013. Melbourne.

[25] Ibid.

[26] Ibid.

[27] Master Builders Association. FAQ’s About Building Contracts. http://www.mbav.com.au/vpLink.aspx?ID=8081 2014. East Melbourne

[28] Ibid.

[29] Ibid.

[30] Ibid.

[31] Fitzroy Legal Service. The Law Handbook: Building Contracts. http://www.lawhandbook.org.au/handbook/ch14s02s03.php 2013. Melbourne.

[32] Ibid.

[33] Ibid.

[34] Ibid.

[35] Ibid.

[36] Ibid.

[37] Fitzroy Legal Service. The Law Handbook: Building Contracts. http://www.lawhandbook.org.au/handbook/ch14s02s03.php 2013. Melbourne.

[38] Ibid.

[39] Daley, A. Domestic Building Matters. http://www.findlaw.com.au/articles/5146/domestic-building-matters---dealing-with-delays.aspx 2012. Sydney.

[40] Ibid.

[41] Ibid.

[42] Ibid.

[43] Fitzroy Legal Service. The Law Handbook: Building Contracts. http://www.lawhandbook.org.au/handbook/ch14s02s03.php 2013. Melbourne

[44] Ibid.

[45] Ridgewater. The Typical Construction Process. http://www.ridgewaterltd.com/#!build/ciij 2014. Sydney

[46] Ibid.

[47] Fair Work Building and Construction. Work Health and Safety. http://www.fwbc.gov.au/work-health-and-safety-2 2014. Sydney

[48] Ibid.

[49] Ibid.

[50] Barry, J. Types of Building Contracts. http://www.lsclawyers.com.au/elibrary/types-of-contracts 2014. Sydney

[51] Ibid.

[52] Barry, J. Types of Building Contracts. http://www.lsclawyers.com.au/elibrary/types-of-contracts 2014. Sydney

[53] Ibid

[54] Ibid

[55] Ibid

[56] Ibid

[57] Ibid

[58] Ibid

[59] Ibid

[60] Ibid

[61]Ibid

[62] Barry, J. Types of Building Contracts. http://www.lsclawyers.com.au/elibrary/types-of-contracts 2014. Sydney

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