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Problems in negotiating the contract
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 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 an allowance called a "provisional sum" will be added to the contract price to provide for those works. That 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 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:
o the initial survey,
o the excavation,
o the piering,
o the foundations,
o the slab,
o the frame,
o the brickwork,
o the gyprocking and internal fit out and
o 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.
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 amount by which the costs have been underestimated and to pay the builder a percentage of the sum 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.
Deemed Inspection of the Site.
Sometimes a builder might seek an increase in price because of site conditions which the builder should have made himself aware of before contracting 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:
(a) 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
(b) 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.
It is suggested that a term along these lines be incorporated into all home building contracts.
"Front End Loading"
Another, related, way in which the contract may be used unfairly to oppress 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 gyprocking and internal fit out stage and
" the installation of kitchen and white goods.
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 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."
Matching progress payments with bank valuations
There is a further problem when Front End Loading results in the value of the work performed to a certain stage being less than the value ascribed to it in the schedule of payments. In those circumstances the finance provider such as a bank or building society is unlikely to pay an inflated progress claim, they will only pay the value of the work as assessed by their assessor. The builder will then receive less than the contractually agreed progress payment for that stage and, unless the home owner can cover the shortfall, the home owner will then be in breach of contract, which may have serious consequences.
It is recommended that a special condition be inserted into the contract to provide that where part or all of the contract price is to be provided by a third party finance provider with with payments being based on the finance provider's valuation of the work, the builder will accept, as the progress payment for that stage, a sum representing the reasonable value as assessed by the finance provider. This is not unfair on the builder because he will get paid any shortfall at the end of the job with the final payment.
Exclusions
Sometimes the builder inserts a typed list of exclusions saying: "Those are my usual exclusions." Read them carefully. There have been times where the home owner expected that all the work the subject of the approved plans was to be done for the contract price, then, after contracting, found that major items such as retaining walls and services connections had been excluded by these "usual exclusions."
Remember what you want
You want your house built:
- on time
- on budget
- free of defects
- in accordance with the plans
If you'd like help in negotiating your home building contract, you can contact us through the button on the bottom right or contact Stefanie Dunnicliff directly by email at [email protected] or by ringing (02) 9689 3992.
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