Before Signing a Residential Contract

Understanding your contract, its inclusions, exclusions, and the jargon used is paramount to ensure you manage your budget and you avoid any additional stresses during your re-build. Here we explain a few key elements like Prime Cost versus Provisional Sum and how that can impact your budget; the importance of obtaining a Home Builders Compensation Fund Certificate (also known as Home Owners Warranty) before you pay a deposit; and explore the benefits of Liquidated Damages.

Written by:
September 11, 2020

What you must do when engaging a builder

·       Check his licence -

·       Request certificates of currency for all his insurances including contract works, Public Liability and Workers Compensation.

What should be included in my Domestic Building Contract?

It is always recommended that you obtain legal advice prior to signing a Domestic Building Contract. One consultation may save you thousands of dollars, stress and pressure on relationships and home life. A benefit of obtaining legal advice from the right lawyer is to ensure that you and your builder both have a clear understanding of what you have agreed upon and that the same is reflected in your Domestic Building Contract. Before you sign your Domestic Building Contract you should make sure that:

  • §  you obtain legal advice(even if you have already signed and you have 5 days to terminate your Domestic Building Contract);
  • §  check that the licence number on the contract is the same the entity’s name on the contract as the holder of the licence builder is a registered builder or in the case of a company.   A licence in the name of an individual does not permit the individual's company or partnership to make the contract, even if the individual is a director of the company or member of the partnership. If the company or partnership is making the contract, the company or partnership needs to be licensed in the company or partnership name;
  • §  you have the correct“working plans” for your project and you understand and agree to what is stipulated in those plans;
  • §  you have all the specifications and have a clear understanding of what the specifications are (it is best to have all of you selections described in detail prior to signing your contract);
  • §  ensure that all responsibilities have been assigned to either you or your builder (as agreed),including who shall be responsible for the supply of goods and who shall be responsible for obtaining the relevant permits, soil reports etc;
  • §  you agree to the Contract Price including GST and understand your liabilities outlined in the Domestic Building Contract, such as payment terms,
  • §  you can easily read and understand what is written in the Domestic Building Contract;
  • §  all terms and conditions are included and it is the complete Domestic Building Contract;
  • §  there are full and complete details described for the work to be carried out;
  • §  all the names of the parties and details are correct;
  • §  the Builder’s registration number is noted and is correct;
  • §  it clearly states the Domestic Building Contract Price (check the GST component);
  • §  it states the amount of deposit payable (this should be no more than 10% for home building contracts.  Contracts. If the work is required to be covered under the Home Building Compensation Scheme, it is illegal for the contractor to ask for a deposit or other payment under the contract unless the cover has been taken out, and a certificate of the cover is given to you. ;
  • §  it states the amount of progress payments payable and that it complies with the Domestic Building Contracts Act 1993.  Ensure that progress payments listed on the contract are for work actually done and not time on the job.  Make sure that the dollar value for each stage is realistic.  Ask for a trade break-down if you didn’t receive one.
  • §  it states the date upon which the Domestic Building Contract was signed by you;
  • §  it states when the work must commence and how the date is to be determined;
  • §  it states that you have a 5day cooling off period;
  • §  it clearing describes all definitions used in the Domestic Building Contract;
  • §  it sets out warranties;
  • §  it has a checklist;
  • §  it sets outs exclusions(such as excavation in rock, anything outside the boundary, driveways and landscaping)
  • §  it sets out the details of the required insurance (if the works are for more than $12,000.00).
  • §  it states the number of days allowed for delays.
  • §  you and the builder understand what  ‘reasonable access’ to the building site is.
  • §  Always sign off on variations made to the Domestic Building Contract ( you don’t have to pay for additional items that should have been foreseen by the Builder when entering into the Domestic Building Contract) and understand what impact if any they have on the program.

 Other thinks to know before you signing a contract.

Before you sign any contract with the builder or tradesperson you should:

  • make sure there's nothing in your contract which     makes you responsible for termite control instead of the builder or tradesperson
  • refer to the Fair-Trading NSW website get more information
  • discuss anything you don't understand with the builder or tradesperson
  • not sign if you're unhappy as you have the right to request changes to the contract
  • get legal advice before you make a change to a standard contract or if the builder or trades-person has amended a standard contract, or included any special conditions.


5 days Cooling Off Period

If you have signed your Domestic Building Contract, you only have five business days after receiving a signed copy to withdraw from the Domestic Building Contract without receiving a penalty, unless you obtained sought legal advice on the contract prior to signing.


What the Builder must do prior to commencing Domestic Building Works.

The Builder must ensure that the site is suitable for the proposed work and that he has obtained the required foundation data information (such as a soil report) that satisfies him enough to proceed with the work. He must also ensure that:

§  he has obtained all building and planning permits (unless otherwise stated in the Domestic Building Contract);

§  he is satisfied with the plans, drawings and specifications (including any specific special requirements) described in the Domestic Building Contract;

§  He must provide you with a copy of the signed contract.within 5 days after you sign it.

§  He must provide you with a Certificate for Home Owners Warranty and can not request a deposit until you have been provided with this.


Prime Cost Items and Provisional Sum Items

Prime cost items and Provisional Sum Items are often misunderstood. It is important that any allowances are not under quoted as this can adversely impact your budget .

Prime Cost is an allowance in the contract for the SUPPLY of necessary items not yet finally selected.  It can include fixtures and fittings that are itemised in your Domestic Building Contract but not described or costed. Usually this happens when you don’t stipulate the make,model or exact selection of items prior to signing your Domestic Building Contract and therefore the builder can only give you an estimate on each of those items. A builder must provide proof that evidences the costs of any prime cost item in the Domestic Building Contract.

Provisional sum is an allowance in the contract for the cost of foreseeable necessary works (labour), including the supply of materials not fully described or detailed at the time that the contract commenced, for example joinery items or solar panels.  Sometimes,excavation work would be noted as a provisional sum item and building costs could increase if additional excavation work is required as a result of rocks,if not provided for in the soil report to your builder.  Alternatively, excavation in rock my be listed in exclusions.

What are liquidated damages (LD).

These are found in construction contract and are the mechanism through which on party can claim monetary compensation for loss or damage that occurs as a result of the other party’s failure to delivery the works under the contract.

As an example, if completion is delayed by reason of the contractor's breach, the contractor will be liable to pay the client a specified sum for each day, week or month during which the delay continues.  If you are relying on the builder to complete by the date stipulated in a contract and there have been no variations that add time to this program and you as an example are renting.  You will have the additional cost of rent until the project is complete and as such you may like to add this cost into the contract and provide an incentive to the builder to complete on time.

Similarly, in some contract an owner can also be bound by liquidated damages for holding up the construction program.



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