3 KEY FACTORS TO HELP YOU TO UNDERSTAND A BUILDING CONTRACT
So you’re getting close to signing on the dotted line, and suddenly you’ve gone a bit wobbly at the knees wondering what on earth this huge document is all about. Well, the blog is all about how to understand a building contract.
Just a disclaimer up front – a building contract is a legal document and just reading this blog won’t provide everything you might need to fully understand every single clause in your building contract. Every contract has its intricacies and oddballs, so always be sure to get legal professional advice if you’re unsure about anything.
If you think of the contract like a 3-legged stool, it will help to explain the fundamentals a bit better. Each of the 3 legs are – 1. Consideration, 2. Relationship, and 3. Dispute resolution. In principle, everything rests on these 3 legs so that the contract stands up whatever happens.
So let’s dissect each of these a bit.
Consideration is somewhat a legal term, but it simply means that each party (in the case of a builder building a home for a family, there’s 2 parties – the builder and the family, or landowner) is getting something out of the deal. So the family is getting a brand new home and the builder is getting money. Of course, the normal expectation is that the consideration is equivalent – the money paid matches the value of the home built.
Consideration is always the first and most essential part of the contract – in fact, without clear ‘consideration’ there is no legally binding contract at all – there’s nothing of substance to agree on! But the actual word consideration probably never appears in a building contract, and that’s because on the surface, a contract is all about the real stuff – the nitty gritty.
Things like the size of the home, the inclusions and exclusions, the size and layout of the home, even the colours of everything. Both parties want to know in detail exactly what is going to be built, especially the homeowner – in consideration for the money they’re going to pay, they want to know exactly what they’re going to get. And in consideration for the sweat and tool of actually building the home, the builder wants to know down to the dollar what he’s going to be paid.
The next leg of the stool is the relationship. Another way of looking at this is to picture the builder and homeowner finally agreeing on the detail of the home itself and how much it’s going to cost, and then they look at each other and say, so how are we going to make it a reality? How will we communicate? When will payments be made? How often will we meet on site to inspect and discuss? Who’s going to do what?
The relationship or process component of the contract may not be front of mind for the parties, especially the homeowner, but from a legal aspect, it’s very important and often takes up more clauses in a contract than the homeowner expects. And that’s because once the honeymoon of agreeing on the specs is over, and the rubber hits the road, then the relationship gets tested, and if there was no prior discussion and agreement on the ‘conduct’ of the parties then things can really go west, really quickly.
Which brings us to the third leg of the stool. Some people may look at dispute resolution as part of the relationship clause – and they have a point – but the one simple reason why it’s treated as a separate leg is that it’s generally when lawyers get involved and it’s a whole separate playing field of its own.
The dispute resolution aspect is not just 1 or 2 clauses, it’s often dotted throughout the whole contract. And it all revokes around what the parties agree to do if they disagree. Which is not a nice thought, but we’re all human and from time to time things go pear shaped so we’ve learnt a long time ago that it’s ten times better to work out ahead of time what to do in the event of a dispute.
This could involve things like what it is that can end a contract – by either party. Or what happens if the builder takes too long to do his work. Or the buyer decides not to pay for some reason. Or the builder finds something horribly wrong on the site. Or the homeowner doesn’t like the way the builder’s done something on the house. There are a thousand and one reasons for things to go wrong, and forcing yourself to think about this beforehand can ease the hassle and heartache quite a bit.
So there you have it – consideration, relationship or process, and dispute resolution are the 3 aspects that underpin a contract. Not necessarily a good or bad contract, but every contract.
A good contract covers everything in detail and doesn’t leave anything to luck or chance.
A good or bad contract is more in the detail. For example, do the plans match the specifications? Are the payment stages spelled out in the detail? Are the late payment penalty rates clearly listed? Many people can’t hack reading lots of legal jargon, and we sympathise with them, but if your contract is very short we’d be a bit worried. A good contract covers everything in detail and doesn’t leave anything to luck or chance.
And thankfully these days, bad contracts are gradually becoming few and far between due to the persistence of the government authorities policing it – because there is a law, the Contracts Act, that governs building contracts. And the law is quite detailed.
Of course, there are industry bodies such as HIA that provide pre-drafted contracts to builders, who just have to add in the variables and details and hey presto you have a ready made contract to sign. There are both pros and cons for these contracts but they’re a sound contract that have been tested in court many times over.
And there are also many other contracts drafted by lawyers specifically for the individual builders and / or homeowners. Same story: there are pros and cons for these contracts to, but if the lawyers worth her salt, then the contract will be safe and sound for the job.
The simple key in trying to understand your building contract is to look at it from a bird’s eye view first – are the basics there? is the consideration spelled out clearly for both sides? and is the modus operandi of the relationship carefully outlined? and is there a fallback position in place for everything?
If you’re confident that the basics are in place, then the next step is to just work through each clause and see if you can get the gist of what it’s trying to say. You might not get your head around the way the lawyers have put it, but as long as you can see the intent of each clause, then you should be fine. But if you don’t, then for crying out loud, ask for help! Don’t bury your head in the sand and think that it doesn’t matter, because it just might!
Before we wrap it up, here are some other comments on things we’ve seen in our experience.
The first one is the homeowner thinking that every clause should be in their favour but that every clause is against them and that they can’t sign a contract that has them responsible for so many things such as the builder finding things on site that may cause the price to go up, etc.
It’s very important for the homeowner to understand that there is an inherent risk in building a new home. This is the real world and there’s no such thing as expecting a fair price and then expecting the builder to take each and every risk. It’s the homeowner that’s initiating the project, not the builder, so the homeowner must be prepared to shoulder a certain amount of the risk involved, and realise that there will be just as many clauses covering the builder as there will be covering the homeowner – the consideration is from both sides.
Whichever way you look at it, there is always risk for both parties in any deal or contract, and in a homebuilding contract, the basic risk on the part of the homeowner is that they might pay for the home and not get what they want, and the basic risk for the builder is that they might build the home and not get paid for it. A contract is all about specifying the risk for each party, and spelling out the corresponding recompenses and mitigations for each of the parties.
Another thing is many of the finer details being overlooked in the excitement of signing the contract.
It’s a very exhilarating experience to sign up to get a new home built, and sometimes all the little details are just annoying things to get out of the road so we can get on with the real thing. But weeks or months later, the homeowner gets a shock about the serious impact of skipping over the fine detail. Things like making sure the boundaries are clearly defined. Or what happens if payment isn’t made on time. There are far too many to list here, but you can probably see where we’re coming from.
But don’t be afraid of the contract – it should be just as much in your favour as it is in the builders favour, and we’ve seen it time and again that where the contract is understood it’s respected and where it’s respected things go well. Treat the contract as a guide and friend not a tool or weapon and you’ll end up a happy camper!
Disclaimer. This blog is our opinion only. The information provided in our blogs is accurate and true to the best of our knowledge, but there may be omissions, errors or mistakes. The information presented in our blogs is for informational purposes only and we are not professionals, so the content we provide shouldn’t be taken as legal advice. We strongly recommend consulting with a professional before taking any sort of action. We reserve the right to change how we manage our blog and we may change the focus or content at any time.