By Kelvin Keane | Nexus Law Group Consulting Principal – Sydney
Many owners enter into residential building contracts unaware of the risks associated with the contract terms that apply when the building work does not go according to plan and a dispute arises between the owner and the builder.
From my experience, there are few owners who obtain legal advice on the terms of the contract even when the contract sum can at times be for several millions of dollars.
While the number of recorded disputes may be small compared to the amount of building work taking place, the emotional and financial impact of building work gone wrong is significant and should be avoided if possible.
There are a number of things every owner should know about residential building work which may save them grief in the long run.
Standard Form Contracts are not necessarily fair contracts
The majority of contracts for residential building work are called standard form contracts because they are mass produced in a standard form for the industry and have terms common to all contracts.
These contracts are cheap and reliable in most instances. The main standard form contracts are produced by the Housing Industry Association (HIA) or the Master Builders Association (MBA). Many builders also use the Office of Fair Trading contracts which are free to download.
However, just because the contracts are standard form does not necessarily mean that the contract is equally balanced as to entitlements. In the case of industry association contracts these are usually balanced in favour of the builder.
For instance, the MBA BC4 contract provides that the builder has 25 days to remedy a breach after a breach notice is issued by the owner, however an owner only has 10 days within which to remedy a breach. The extended time that a builder has to remedy a breach can mean that the owner has a long time to wait before they can terminate a contract and take over the work to finish it when things go wrong.
In most HIA and MBA contracts the owner has no right to set off money from a builder’s progress claim to rectify defective work until the end of the project. This can mean that the owner cannot ensure the work is completed to an appropriate quality at every stage and if the builder fails to complete the work, the owner is left with defects requiring rectification even though they have paid for the work to that stage.
Contracts, even standard form contracts, should therefore be the subject of review before being signed.
The NSW Government’s home warranty insurance cover does not necessarily provide cover as soon as something goes wrong
Home warranty insurance, which is now known as Home Building Compensation Fund (HBCF) cover, is a statutory cover for an owner when they cannot have their building work completed or rectified due to the builder’s insolvency, death or disappearance.
It does not therefore always cover the owner immediately a dispute starts. The owner must first pursue the builder for any loss until they get an award from a court or tribunal or often until the builder becomes insolvent.
This can be a costly process especially if proceedings are commenced and even though the HBCF cover does reimburse legal costs for pursuing a builder, those costs are taken out of the total amount of cover.
In some of the worst instances the legal costs can be more than the insurance cover of $340,000 and therefore no additional amount is available to complete the work or rectify the defects.
An owner cannot safely say therefore, I have insurance cover therefore I am protected.
Protection in most instances will come from properly checking and managing the work and payments and a contract should include terms that allow an owner to do this effectively.
The fact a builder has a licence does not necessarily mean they are a good builder
Complaints against builders and tradespeople have not significantly reduced over the years despite an increase in government regulation and supervision of the industry. Highly recommended and experienced builders can get into difficulty as easily as poor quality builders for a lot of reasons and when they are struggling for financial survival the homeowner can come off second best.
The provision of a licence number does not guarantee the licence is valid for the work being undertaken as there may be conditions on the licence which limit the type of work or the value of the work undertaken. There are different licences for different entities such as licences for individuals or companies so it is important to check the entity or person on the contract documentation and determine if the entity or person holds a valid licence.
Licence and entity checks should be part of the initial contract review. Why is this important? Because in some cases I have seen owners unable to claim on the HBCF insurance or pursue people responsible for the defective work because the wrong entity or licence number was on the contract.
The fact a builder is a member of a building association does not guarantee their quality
I have heard owners say that they thought that the fact a builder was a member of an association such as the HIA or MBA offered them some protection because they would be able to complain to that association and get them to make the builder fix the work.
Unfortunately, this is incorrect. You can complain however, if the builder does not want to fix or complete the work. At worst the association can take away their membership.
These associations are merely groups of members in the same industry joined together for cost and other benefits that can be obtained by a large group of like-minded people.
Cost plus contracts generally mean cost more work
An often-heard comment from owners when complaining about the blow out in costs in a cost-plus contract is that the builder told me this was the cheapest way to do the work and that it would save me money.
Sometimes it is not the builders fault the cost-plus contract blows out as the owner has overspent on fittings and variations, however, it is common place that the cost blow out is purely due to the fact that the builder or architect provided an unreasonable estimate of the cost of the work at the commencement.
Cost plus contracts have their place but for residential building work a builder should be able to provide a fixed price contract.
Beware also of fixed price contracts that have a large percentage of provisional sums for work rather than fittings. Some builders rely on low provisional sums to keep their quotation low to get the job. This can allow for blow outs from higher provisional sum costs.
Certification by a certifier does not guarantee work is performed to the required standard
Certifiers are required to undertake a number of mandatory inspections but in many instances can rely on the self-certification of the person undertaking the work.
This means that at times when an inspection is missed all they are required to do is to have that person provide a certificate verifying that the work is undertaken to the appropriate standard. This may be appropriate where the work is not within the capacity of the certifier to certify, for example with structural engineering work or glazing certification however it is within the capacity of the certifier to verify that such things as framing and waterproofing are to the required standard.
Framing and waterproofing inspections are mandatory inspections for a certifier. Every waterproofing installation in residential building work where a development application is required is therefore supposed to have been inspected by a certifier. Despite this, failed waterproofing is the biggest cause of defective building work in the industry.
If you have a large job therefore it is sometimes better to have an independent assessor such as an architect, quantity surveyor or building consultant to check the work for quality and completion at each stage before payment. Your contract will have to provide for this.
If you have any questions, contact Kelvin Keane at [email protected] or telephone +61 (2) 9016 0141
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.