What a Residential Building Contract Is
A residential building contract is a legally binding agreement between a homeowner and a builder or contractor for the construction, alteration, or repair of a residential building on land in New South Wales. Under section 4 of the Home Building Act 1989, a residential building contract is defined as any agreement with a builder or contractor to carry out residential building work exceeding the monetary threshold of $5,000 or 10% of the total building contract price that a licenced builder must fulfill to obtain their licence.
The purpose of a residential building contract is to outline the respective rights, obligations, and responsibilities of the homeowner, the builder and/or contractor. This agreement serves as a form of protection for both parties under the Home Building Act 1989 , outlining various legal and other obligations that must be enforced if a dispute were to arise.
Under section 6 of the Home Building Act 1989, it is mandatory for all residential building contracts (for building works exceeding $20,000) to be in writing and contain a number of prescribed particulars, including but not limited to: the name and address of the parties, the building date and description of the works and the total estimated cost of the building works.
Residential building contracts are one of the most important documents for homeowners, builders and contractors to negotiate and agree upon before carrying out residential building work in New South Wales.
Essential Aspects of a Building Contract
The primary parties to a building contract are the owner of the land (often the land’s developer) and the builder. The agreement between the parties, usually in the form of a written contract (‘the building contract’) creates the relationship between the two.
The negotiated terms and conditions of the building contract between the parties can result in either a fair or unfair building contract. The latter usually arises because the owner is a novice in building matters and is pressured by the builder to enter into an agreement quickly. Sometimes builders present contracts on a ‘take it or leave it’ basis.
However, it is vital for owners to understand all aspects of the relevant building contract before entering into the agreement. The important features of any residential building contract are:
Parties – this provision sets out the parties to the contract. The names of the parties and their contact details must be recorded.
Scope of work – this sets out what the builder must do under the contract. If the scope of work is not clearly recorded it becomes a point of dispute between the parties.
Variations – a variation is an agreement between the parties which must be in writing when it relates to the amount of money which may become payable under the contract. The contract must include a Clause for variations (also referred to as an ‘addendum’ or ‘section J’) to be binding.
Payment terms – this sets out the schedule for payments to be made by the Owner to the Builder during the course of the contract.
Building plans – the contract will refer to the plans prepared by a draughtsman, architect or interior designer.
Timeline – parties may agree on a commencement date and a completion date for the contract. The owner must give the builder reasonable access to the property to enable it to fulfil its contractual obligations.
Dispute resolution – the contract should contain a clause dealing with disputes between the parties regardless of the resolution process adopted. A Resolution clause should contain steps to be followed before a party can commence legal action against the other. In the absence of Resolution Clause, the parties will lose the opportunity of resolving the dispute by means of mediation or arbitration.
Legal obligations – the general law creates rights and entitlements for the parties to a building contract. However, such rights and entitlements may conflict with the provisions of the applicable legislation governing building and construction in your province.
Frequently Encountered Issues and Avoiding Them
Despite the fact that most residential building contract agreements are template contracts, they are often the source of disputes between homeowners and builders. Some of the most common disputes arise from the following clauses:
Land Ownership
Often, a homeowner may want to build a secondary suite or extension on an existing residence. This can lead to a dispute if the homeowner cannot provide proof that they own the land on which they want the construction to take place. Make sure to provide proof of ownership to avoid this problem.
Scope of Work
The scope of work details what will be done by the builder and when it is to be completed by. If you have a specific date when you want the work to be completed, ensure that this is included in the scope of work/proposal. Always include a place in the contract for both the homeowner and builder to initial the scope of work/proposal to show that it was agreed upon by both parties.
Work Changes and Delays
In the proposal/scope of work, you should allow for some flexibility in the timeline for completion, and a chance to pass any additional costs onto the homeowner. Construction projects are notoriously fluid, so it is likely that the costs of materials and labour or the project timeline will change at some point. If the builder is not allowed to pass these costs onto the homeowner, they will be required to eat the costs and this can cause financial strain for the builder. A certain amount of flexibility for delay and cost allowances can help to alleviate this.
Another common way that disputes arise is when additions are made to the project once construction has begun. Many builders include a clause that allows them to either remove a project component or substitute it with a different item, to avoid being behind schedule or paying for an expensive item that the homeowner wants. The homeowner may not be aware of this clause and may be angry with their builder when, for example, the specification for a top of the line bathtub is replaced with a mid-range model and they notice halfway through the job.
To avoid disputes, it is important for a homeowner and builder to discuss the potential for changes in writing. If additions must be made to the project mid-way through the job, ensure there is a record of the agreed-upon change.
Legal Aspects and Compliance Requirements
The same is true for the various rules and regulations governing the industry. Your construction contract should address all building codes and regulations, zoning requirements, and any other legal considerations that may apply, depending on the specifics of the project. They should also detail how they will impact the relationship between the contractor and the homeowner, and what recourse either party has in the event those requirements change midway through the contract.
Matters like intellectual property, land use rights , and use of tools and equipment must also be thoroughly covered. The mechanics involved may not be able to tape into a socket or use a drill owned by a project manager or lead carpenter without specific provisions granting them the ability to do so.
Finally, the building contract should cover all state and potentially federal licensing requirements. General contractors, subcontractors, and any other necessary representatives must possess the licensing required by state law, both to hire and be hired. If licensing is not addressed in the contract, it could be specifically requested by the homeowner or property owner, depending on the particulars of the case.
Contract Terms and Negotiation
When you agree to enter into a building contract with a builder for residential building work, in addition to entering into the contract you will also need to negotiate it with the builder. The process of negotiating and documenting the agreement, is as much part of the process of entering into the building contract, as is the negotiation of the terms of the building contract. However, when it comes to negotiating the terms of the building contract, you may be surprised by how much power you have in that negotiation.
Whether or not you are a sophisticated commercial property developer or simply someone who is looking to build a home for your family or to do a renovation on your existing home, you will almost certainly be in a position where you will be able to negotiate the terms of the residential building contract. The reason for this is simple – the demand for builders is at an all-time high, which means that builders are now more willing than they have ever been, to negotiate the terms of a residential building contract.
As a result they will almost always be willing to – at the very least – consider any amendments to the conditions of the building contract that you the Owner might suggest, no matter how onerous those conditions might seem to the Builder.
If you are in a position to negotiate the terms of the residential building contract, there are a few points that you should remember as a general rule of thumb.
However that said, you should think carefully before you decide to take this path. It goes without saying that you should only deal with builders who are of high quality and who take their obligations seriously. If they offer a discount, there may be a good reason why.
The Construction Attorney’s Role
Typical clients for a construction attorney are either the property owner who is preparing to build a single-family home or a builder or remodeler who has built a home or is about to do so. Clients often ask when is the right time to bring an attorney into the process and what does an attorney actually do for a client in this context.
The best time to bring an attorney into the process is well before a contract with a builder is signed or the property owner gives a deposit to a builder. A builder or remodeler is only as good as his contract and that contract should accurately reflect the scope of work, the timetable, and the costs involved in completing the work. However, a construction contract is not just about having an agreement as to what goes into the building, but what goes into the agreements your builder has with his suppliers and subcontractors. It is important to have your attorney review your builder’s contracts and give you advice as to the enforceability of the warranties and guarantees in those contracts.
Many builders carry errors and omission insurance and general liability coverage. You should make sure that your builder provides you with evidence of that coverage when he gives you a written guarantee. In the event your builder disappears with your $20,000 down payment, require your builder to complete a bond release form and file it with the city or county along with a copy of his warranty. Failure to do so may result in the completion of work by another builder being delayed because of a recorded mechanics’ lien against your property.
Information that should be included in your contract with your builder: First and foremost, your builder must tell you if he is licensed to build in your state or country. Another area of concern is the cost of the construction. You should define very carefully what components of the overall agreement with your builder are fixed and what components are estimates. Usually , items such as excavation, concrete work, flooring materials, stone and other materials vary from quote to quote depending upon days of the week, season, weather conditions, etc. You should carefully review the bid with your builder and understand whether the price quoted is fixed or an estimate. If it is an estimate, ask your builder for a worst-case-scenario projection of those costs at the time you sign the contract. Also, it is important to closely monitor any changes to the construction process as the project continues. If possible, have monthly or bi-monthly progress reports prepared by you and your builder to keep the timeline and costs on course. If the project falls behind schedule, be sure to keep contemporaneous notes as to the reasons for the delay and the anticipated date of completion.
It is important for the homeowner to conduct a final walk-through of the house to make sure all items on your punch list are completed to your satisfaction. One of the more common complaints of builders is that the walk-throughs are painful. Given the amount of time, energy and money that you have placed into a project, it is understandable why a homeowner may be impatient with a builder to "finish the job." It is important, however, that you resist that temptation and remember that your builder is running a business. He wants to finalize the job and collect his money just as you do. Hold the builder to his contractual obligation by submitting a punch list and having him sign off on it before you make your final payment. Be polite but firm and constructive in the approach so that the builder will remember that you are even-handed in your dealings with him.