BUILDERS GUIDE TO CONTRACTS 

Index 

Chapter 1 – Introduction 

Chapter 2 – Types of contracts 

2.1 Fixed Price Contract 

2.2 Cost Plus Contract 

2.3 Architect Administered Contract 

2.4 Sub-Contracts 

Chapter 3 – Domestic Building Contracts Act 1995  

3.1 The mandatory requirements in building contracts 

3.2 Builders have to be registered 

3.3 Statutory warranties 

3.4 Deposits 

3.5 The cooling off period 

3.6 Variations 

3.7 No Charging Clauses 

3.8 Mandatory checklist 

3.9 Cost Plus threshold 

3.10 The forum for resolving building disputes 

3.11 Fixed completion date 

3.12 Legislated payment junctures 

Chapter 4 – Filling out the contract  

Chapter 5 – Residential insurance  

5.1 All building practitioners are required to have insurance 

5.2 Application of proportionate liability 

5.3 The period of time by which one can issue legal proceedings 

Chapter 6 – Key tenets for successful contracting  

6.1 Know what you are getting and the devil in the detail 

6.2 Nominate one person to deal with the builder 

6.3 Avoid changes in the scope of the works 

6.4 Pay on time 

Chapter 7 – Key terms and contractual jargon  

7.1 Liquidated damages 

7.2 Prolongation costs 

7.3 Great care should be taken in calculating liquidated damages 

7.4 Prime Costs and Provisional Sums 

7.5 Inclement weather 

7.6 Occupancy permit 

7.7 Certificate of final inspection 

7.8 Building Code of Australia 

7.9 Australian standards 

Chapter 8 – Contract administration  

Chapter 9 – Dispute resolution and the Victorian Civil 

and Administrative Tribunal  

9.1 The directions hearing 

9.2 The mediation 

9.3 How to approach mediation  

9.4 What next if the matter does not settle? 

9.5 Discovery and the list of documents 

9.6 The compulsory conference 

9.7 Trial 

9.8 Preparing for trial 

Chapter 10 – Common prosecutable offences and 

disciplinary bodies  

10.1 Doing work without a compliant contract 

10.2 Lack of compliant insurance cover 

10.3 Building permits and lack thereof 

Chapter 11 – Appealing before disciplinary bodies  

Chapter 12 – Building Advice and Conciliation Victoria  

12.1 Advice 

12.2 Conciliation 

12.3 Inspection 

12.4 Enforcement 

This document is Copyright. Subject to the Copyright Act, no part of the

document may in any form or by any means (electronic, mechanical, recording,

copying or otherwise) be reproduced or transmitted without the prior written

consent of the author. Enquiries should be addressed to:

Kim Lovegrove c/o- Lovegrove Solicitors

Level 2/405 Little Bourke Street, Melbourne VIC 3000 Australia

ABOUT THE AUTHORS 

Professor Kim Lovegrove

Professor Kim Lovegrove is a partner of Lovegrove Solicitors, Commercial and Construction Lawyers.  He has twenty years of experience as a construction lawyer, and has written numerous books on construction law.  He is a Conjoint Professor Building Regulations for Certification at the Newcastle University.

Professor Lovegrove was the lawyer engaged by the Victorian Government as its principal legal advisor on the development of the Building Act 1993; and in that position he was instrumental in the creation of this groundbreaking legislation; the first of its kind in the world. 

In the early nineties Kim was Assistant Director of Building Control in Victoria and also Deputy Executive Director of the Australian Building Codes Board. More recently he was Chairman of the Building Practitioners Board for 3 years. 

Lovegrove Solicitors have extensive experience and expertise in both property and construction law; and are happy to be consulted on point. 

Stephen Adorjan

B ARCH (Melb); LL B (Monash)

Stephen has worked in Australia and overseas; as design architect, superintendent, contract administrator, builder, estimator, project manager; in private enterprise and for the Commonwealth government. 

Stephen has been in-house solicitor and Legal Manager of the Master Builders Association of Victoria (“MBAV”); where he still works part time as solicitor for special projects. 

Stephen was a member of the National Practice Committee of the Australian Institute of Architects (AIA); Stephen was heavily involved in the drafting, reviewing and updating of all contracts and other practice aids published by the AIA.  

As Legal Manager of MBAV, he spent 9 years on the National Contracts Advisory Committee of the Master Builder movement; where he had a similar role in regard to the various standard contracts and guides published by that body.  The work of this Committee also includes the ABIC suite of contracts, which is developed, published and updated as a joint venture with the AIA. He is also familiar with most of the other standard contracts widely used in the industry, and can assist in comparative analyses of these.

CHAPTER 1 – INTRODUCTION 

This small publication has been written to assist builders with understanding residential building contracts. It also provides insights into the ways by which they can manage and minimise many of their risks.

The publication touches upon the potential downsides of building contracting; and it also discusses the methods by, and the forums where, domestic building disputes can be resolved in Victoria.

CHAPTER 2 - TYPES OF CONTRACTS 

2.1  SOURCES OF STANDARD CONTRACTS 

There are numerous standard form building contracts that regulate and govern the way in which the contracting parties deal with one another.  Some of the best of these are produced by industry and professional associations, such as the:

 Master Builders Association (MBA);

 Housing Industry Association (HIA); and

 Australian Building Industry Contracts (ABIC) – which is a joint venture between MBA and the Australian Institute of Architects (AIA)

These organisations have published head contracts designed to comply with the onerous requirements set for domestic building contracts by the Domestic Building Contracts Act 1995 [“DBCA”]. The DBCA is an Act of Parliament promulgated with the objective of affording consumer protection to home owners (and, to a lesser extent, other property owners) in their direct dealings with building practitioners for domestic building services.  The intricacies of the Act will be discussed in some detail later in this manual.

What must be remembered is that, generally speaking, these contracts are negotiable as between owners and builders. They all contain space for provisions that are particular to the contract in question, and which must be completed by the parties in accordance with the bargains they make as a result of those negotiations.  Such matters include the contract price, the contract completion period (or date), liquidated damages (if any), excluded work (if any), provisional items (if any), percentage for builder’s margin on variations and/or provisional items and so on.  

In addition, the parties may agree to change the printed conditions by 

 adding special conditions; or

 deleting certain conditions; or

 modifying certain conditions.

Legal advice should always be sought before making any such adjustments, as any changes made to the standard text can have unintended legal consequences. As well, certain components of the standard text are prescribed by the legislation and those may NOT be removed or altered in any way.

Before agreeing to use such a contract, builders should engage an experienced construction lawyer of their own to check whether a modified non confirming contract 

 is in fact compliant; and

 does not infringe Standards Australia’s intellectual property rights.

Remember: it is the builder who will be punished for using the wrong contract, regardless of who prepared or selected it!

2.2 FIXED PRICE (HEAD) CONTRACTS 

Both MBA and HIA produce compliant fixed price head contracts – also known as fixed lump sum contracts. For characteristics of fixed price contracts refer to Chapter 7.

2.3 COST PLUS (HEAD) CONTRACTS 

Refer to Chapter 7 for discussion of these contracts.  

2.4 ARCHITECT ADMINISTERED (HEAD) CONTRACTS 

Sometimes building contracts (whether fixed price or cost plus) will be administered by the owner‟s architect.   In these situations the architect will have dual roles: 

 s/he will act as the owner‟s agent and adviser and will administer the contract on the owner‟s behalf; and

 s/he will also act as an independent expert certifier.  

Certifying functions involve those where the architect is called upon to bring his or her expertise and experience to determine questions of quality (whether the builder’s performance meets the contractually stipulated standard, whether completion has been achieved) and quantity (whether or how far claims for payment, cost adjustments or extensions of time are justified). In this role the architect must act impartially– without regard to which party may or may not benefit from or his or her objective decision. Contracts for such an arrangement must be drafted accordingly. 

There is a set of compliant fixed price architect-administered head contracts published under the banner of Australian Building Industry Contracts [“ABIC”].  These are not supposed to be used unless there is a registered architect administering the contract.  

Please remember also that, unless you nominate it otherwise in your tender, you will probably not be entitled to any deposit under the ABIC contracts.

2.5  BESPOKE CONTRACTS 

It is always possible for a party to have a complying domestic building contract drafted specially for its own use in general or for a particular project.  Alternatively, it is possible – with the consent of the copyright owner – to amend or adopt an existing standard contract to suit a party’s own needs. Anyone contemplating such a move would be extremely foolish to do it otherwise than by briefing a very experienced construction lawyer to do this work.   

On the receiving end, whenever asked to tender on the basis of an unfamiliar contract – or of a familiar contract full of unfamiliar changes – builders should immediately consult an experienced construction lawyer to review the contract and advise on:

 whether the contract does, in fact, comply fully with the DBCA; and

 what additional or increased risks does the contract impose on the builder ?

It is only in possession of this advice that you can make informed decisions concerning whether to submit a tender and, if so, how you may manage the risks involved. 

2.6 SUB-CONTRACTS 

These are contracts between builders (head contractors) on the one hand and trade or supply contractors on the other hand; for certain specified parts or components of the work which the builder must perform under the corresponding head contract.  The trade contractors typically include concretors, carpenters, steel fabricators and erectors, bricklayers, plumbers, cabinetmakers and so on. 

These contracts are excluded from the legal definition of “domestic building contracts” and are therefore not subject to the DBCA. (Note however that any dispute involving a subcontractor in a domestic project will still be a “domestic building dispute” and subject to the relevant rules).

Normally no direct rights or obligations arise between owners and subcontractors.  Therefore they must only communicate with each other via the builder, who is the only person bound to them both. Any breach of this protocol by either side can lead to serious complications, delays, cost blowouts and disputes; often ultimately borne by the builder. 

Standard form subcontract conditions are also available from the same sources as head contracts.  Usually – but not always – these subcontract conditions have been drafted to “dovetail” with a particular corresponding head contract. Generally it is good practice to use these combinations where they are available.

CHAPTER 3 -   DOMESTIC BUILDING CONTRACTS ACT 1995   [“DBCA”]

This is an Act of Parliament which governs most residential building design and construction.  Builders carrying out  “domestic building work” must comply with this legislation and the contracts for this type of work must also comply with it. The definitions of “domestic building” and of “domestic building work” are very broad. 

 3.1        WHAT IS DOMESTIC BUILDING?

 “Domestic building” is essentially any building that is or will be readily (that is: without substantial changes) capable of being used as a home (or as homes). 

 3.2 WHAT IS DOMESTIC BUILDING WORK?

“Domestic building work” includes all construction work relating to such buildings and includes demolition, repair, alteration, extension, renovation work and so on. It also includes all other construction work associated with, or on the land occupied by, these buildings – such as landscaping, paving, fencing, car ports, garages, swimming pools and so on; as well as the provision of services – such as lighting, heating, ventilation, air conditioning, water supply, sewerage or drainage to the home or to the property on which the home is or is to be.

In addition, design and other pre-construction work (referred to in the Act as “the preparation of plans and specifications”) for domestic buildings is also classified as “domestic building work” unless it is design work carried out by an appropriately registered

 architect; or 

 draftsperson; or 

 engineer 

Therefore if a builder carries out pre-construction (especially design) work for a domestic client, that work, too, will be “domestic building work” and fall within the ambit of the DBCA.  

3.3 EXCEPTIONS

Certain “single trades” are exempt from the scope of the DBCA. These are the following:

 attaching external fixtures (awnings, security screens, insect screens, balustrades etc);

 electrical work;

 glazing;

 installing floor coverings;

 insulating;

 painting;

 plastering;

 plumbing work 

 wall and floor tiling 

 erecting a chain wire fence to enclose a tennis court;

 erecting a mast, pole, antenna, aerial or similar structure.

These trades are exempt only as long as the tradespersons concerned do not carry out any other type of work on the project.  For example, if a glazier replacing glass to existing windows should also repair or re-paint the timber frames of those windows, the exception no longer applies.

Certain Court decisions indicate that work carried out for developers (as distinct from home-owners living – or intending to live – in the dwellings in question), may also be exempt from the DBCA.  This is somewhat controversial and builders relying on it may yet be proved wrong.

There is one notable other exception: “… any work involved in obtaining foundations data in relation to a building site” is also excluded from the definition of domestic building work.  However, case law has established that this exemption applies strictly

only to the “obtaining” of the data; but all further dealings with the data thus obtained (analysis, classification, establishment of bearing capacity etc) will constitute domestic building work.

3.4 DOMESTIC BUILDING CONTRACTS AND MAJOR DOMESTIC BUILDING CONTRACTS

All contracts for the provision of domestic building work are defined as “domestic building contracts”. 

All domestic building contracts with a price above $5,000.00 are defined as “major domestic building contracts”. Note that the $5,000.00 refers to the FINAL contract price.  As a matter of prudence therefore every contract that may end up exceeding this amount during construction (because of variations) should be treated as a major domestic building contract, even if the initial price is below $5,000.00

Stringent conditions apply to all domestic building contracts and in particular to major domestic building contracts. Because the vast majority of contracts will be major domestic building contracts, all further discussion will be dealing with these.

3.5 REQUIRED INSURANCES

Unless the work in question is exempted, the legislation requires builders to provide a certain “homeowners‟ warranty insurance” to their domestic clients, before carrying out any work and before accepting any moneys under the contract.  The details of this insurance policy are set out from time to time in Ministerial Orders published in the Government Gazette. 

Domestic builders must hold eligibility for this insurance from one of the approved insurers, as a pre-condition of their registration as domestic builders.  Whenever they enter a contract where this policy is required; they must also obtain a job-specific policy under this eligibility cover and provide a copy of that policy, or of a certificate of the policy, to the owner. Until this has been done, it is unlawful for the builder to carry out any work under the contract or to demand or accept any money (including any deposit) under the contract. 

The following work is currently exempt from this requirement:

 any work with a price below $12,000.00 (but again remember that, as soon as the price increases and passes this limit, the insurance becomes required); and

 “multi-storey, multi-unit developments”.

The definition of the second exemption is somewhat convoluted and builders are encouraged to seek legal advice before deciding whether a project qualifies for that exemption.

3.6 MANDATORY REQUIREMENTS UNDER s31

Mention was made earlier that major domestic building contracts must comply with the DBCA.  There are standard form contracts on the market, which are considered to comply with those requirements. These have been published by the Master Builders Association of Victoria [“Master Builders”] and the Housing Industry Association [“HIA”] respectively.

There are also complying contracts published under the “ABIC” banner.1  These are designed for – and should only be used – for contracts where a registered architect is appointed to administer the contract and to act as certifier.

1  Australian Building Industry Contracts (A joint enterprise by Master Builders Australia and the Australian Institute of Architects.)

It is also possible to custom-draft other complying contracts, but this should not be undertaken by others than experienced construction lawyers.Regardless of whether a contract is standard form or custom-drafted, section 31 of the DBCA imposes all of the following mandatory requirements:

 The contract must be in writing

 It must set out in full all of the terms of the contract

 The work to be done must be described in detail

 The contract must include the plans and specifications for the work, and those plans and specifications must contain enough information to enable the obtaining of a building permit

 The names of the parties and their respective addresses must be included

 The builder’s domestic registration details must be shown

 A date must be specified for the start of the construction work. If a fixed date cannot be specified because of pre-conditions that need to be satisfied first, a contractual mechanism must be set out, spelling out how the commencement date is to be ascertained. For instance the contract may provide that work will start 7 days after the issuing of the building permit.  Either option is acceptable, as long as there is clarity on this point.

 In like vein, the date for completion must be specified. Whenever the commencement date is not known in advance (see above), the date for completion needs to be stated in terms of the number of calendar days that will elapse after the commencement date (also known as the contract period). Note that the builder must also specify how many calendar days he has allowed in the contract period for the following:

o actual working days;

o non-working days (weekends and gazetted public holidays);

o other breaks in the continuity of the work (such as RDO‟s and Christmas close-down);

o delays due to inclement weather;

o delays due to the effects of inclement weather;

o other delays that are reasonable to allow due to the nature of the contract.

 The contract price must be stated. Note that this price should be GST-inclusive.

 The date on which the contract is signed by the parties (known as the contract date) must be shown

 The contract must be in English and its turn of phrase must be clear

 It must contain a conspicuous notice (the form of which is prescribed in the Regulations) concerning the owners‟ rights to a cooling-off period and how that right may be exercised (see 3.5 below)

 A definitions section must be included, and all defined terms must be shown in a distinctive manner whenever they occur throughout the text. Examples of the distinctive manner include bold type or italics.

 The contract must include the statutory warranties in sections 8 and 20 of the DBCA (see 3.3 below)

 A checklist must be included, in the prescribed form. This checklist is to verify that the owners understand key provisions of the contract before they sign it.

The legislation also provides that the contract is “of no effect” unless both (all) parties have signed it.   This provision is puzzling because ordinarily the laws do not insist on this formality before recognising that a binding contract exists. Nevertheless, this is what the Act says; and a failure to have it signed by all parties may prevent them from enforcing it.   

3.7 BUILDERS MUST BE REGISTERED

Unless they fall into one of the exempted categories, all building practitioners who carry out domestic building work for owners2 must be registered in a relevant category3 by the Building Practitioners Board. 

2  as distinct from sub-contracting to a registered head contractor

3  Relevantly either as domestic builder unlimited [DB-U], or in one of the categories of domestic builder limited [DB-L]. 

4  It must be remembered that “owner” for these purposes also includes any “owner-builder”. 

Under normal circumstances Building Surveyors may not issue a building permit for domestic building work under a contract until they are satisfied that the builder in charge of the construction work is appropriately registered (and holds the required insurance). In most cases the required registration will be “domestic builder unlimited” (DB-U).  

Builders registered as “domestic builder limited” (DB-L) are restricted to contracting with owners4 only within the limited capacities included in their registration. For example a “DB-L (carpenter)” may contract with owners only to carry out carpentry work, and so on.  Unregistered building practitioners may not contract directly with owners at all – unless they fall within and satisfy the “exempt single trade” conditions (see item 3.3 above).  

Building surveyors may only issue building permits for domestic building work without identifying a DB-U as the builder when the work will be carried out by an “owner-builder”.  There are only two legitimate ways of becoming an “owner-builder”.  First, if:

 the registered proprietor of the land is already a registered builder or registered architect; and

 wishes to act as the builder for him-her- or itself.  

Otherwise one can only become an “owner-builder” by applying for and obtaining an owner-builder certificate of consent from the Building Commission. Note that only natural persons are eligible to apply for this certificate, and there are other conditions and restrictions attached to this option.

Before dealing with any prospective builders, owners should ascertain their registration numbers, and verify them with the Building Commission. The Commission maintains an on-line as well as a telephone enquiry line for this purpose.  Whenever in doubt, seek legal advice.

3.8 STATUTORY WARRANTIES

Section 8 of the DBCA specifies a set of warranties for the benefit of the owners that apply, by force of law, to all domestic building work – regardless of whether they are or are not also incorporated in the contract for that work. However, the legislation does require these warranties to be expressly incorporated into all MDBC‟s, as well.

Furthermore, these warranties

 cannot be waived by the owners or contracted out of by the parties; and

 “go with the land” – so as to benefit future all future owners during their ownership of the land.

Under section 8 the builder warrants that:

(a) the work will be carried out in a proper and workmanlike fashion and in accordance with the plans and specifications; and

(b) all of the materials will be good and fit for their purposes and – unless otherwise specified – will be new; and

(c) the work will be carried out in accordance with all laws, not limited to the Building Act.  This extends the compliance requirements to include – for example – relevant provisions of the Building Regulations; the Building Code of Australia [“BCA”]; and the Disabled Discrimination Act 1992.

(d) the work is carried out with reasonable care and skill and in a fashion that is specified in the contract; and

(e) in the case of construction or renovation of a home, the work will be suitable for occupation once the work is completed; and

(f) in circumstances where the contract states that the work is for a particular purpose, the work will be fit for that purpose.

Any breach of these warranties will constitute a defect. 

Section 20 implies another warranty, namely that

“… any provisional sum included by the builder in the contract has been calculated with reasonable care and skill taking account of all the information reasonably available at the date the contract is made, including the nature and the location of the building site.”

Note that this warranty does not cover provisional sums that have been included by, or at the request of, any other person (such as the owner or the architect).

3.9 DEPOSITS 

Builders are not permitted to ask for or accept a deposit greater than

 5% of the contract price where the contract price is $20,000.00 or more;  or

 10% of the contract price where the contract price is less than $20,000.00.

Note that the deposit is not payable until the builder has provided the owner with a copy of the required insurance policy or certificate.

3.10  COOLING-OFF PERIOD 

Owners are generally allowed to withdraw from domestic building contracts within the first 5 days following their receipt of a copy of the contract.  Owners who wish to exercise this right must serve a written notice on the builder, within the permitted 5 days, stating that they withdraw from the contract under these provisions. 

If this is done in time and by the correct notice, the owner is not responsible or liable to the builder in any way – except for $100.00 and for any out of pocket expenses that the builder may have already incurred with the owner’s approval.  The builder must return any deposit it may have received – minus the above amount/s.

Note that in some circumstances owners are not entitled to any cooling-off period. These circumstances are set out in the mandatory Cooling-off period Notice bound into each contract.

Note also that, if a major domestic building contract does not contain the mandatory Cooling-off period Notice, the owner retains his or her right to withdraw from the contract until 7 days after becoming aware that the contract should have contained that Notice. This means that, in some circumstances, much – or all - of the work may already be completed when suddenly the owner can not only end the contract without any compensation to the builder, but possibly also be entitled to demand their money back.  This possibility must be avoided at all costs!   

3.11  “NO CHARGING” CLAUSES

Any provision in a major domestic building contract, which attempts to give the builder an estate or interest in the land constituting the site of the works for the purposes of placing a charge or caveat on that land, will be void and unenforceable. This means that builders may not obtain any security over the site for any of the owners‟ unpaid debts.  In cases where a builder is dealing with unknown owners in contracts involving amounts the builder cannot afford to lose, he or she should consider the following options:

 insist on receiving written guarantees of the owner’s performance of his/her/its obligations under the contract, backed by registrable securities over some other land owned by the guarantor/s;5 or

 insist on receiving unconditional “bank guarantees” to secure any debts by the owners; and/or

 taking prompt and resolute action (such as suspension and/or termination of the work within the contractually agreed terms) as soon as any payment is late or incomplete; or

 not entering the contract in the first place.

5  The land needs to be unencumbered to the extent required to secure the owner’s obligations. The guarantor may be the owner and/or any other party with the necessary means and security.

Note that despite the above, separate – so-called collateral – agreements or guarantees given by owners may contain charging clauses over the land of the site.  However, these provisions will also be declared invalid by the Courts if they are seen as an integral part of the building contract – namely if the builder refuses to enter the building contract unless the collateral agreement is also entered by the owner.

3.12 FIXED PRICE ANDCOST-PLUS CONTRACTS

One of the aims of the legislation is to compel builders to give owners as accurate a picture of their final overall financial commitment as is reasonably possible at the time of signing the contract. 

For this reason, builders must give reasonable estimates for certain fees which (although they do not form part of the contract or of the contract price) the owners will need to pay to some third parties; such as building permit fees or service connection fees.  The contracts must also direct the owners‟ attention, by warning notices, to all of those clauses which may legitimately serve to vary the price. 

Also for this reason, the contract prices of MDBC‟s must generally be fixed lump sum prices; not subject to adjustment for changes in the cost of labour or materials; or to other “cost escalation” provisions.  

In particular, Cost Plus type contracts are prohibited, with only the following exceptions:

 where the contract price is likely to be at least $500,000.00; or

 in the case of work in existing buildings, where it is not possible to calculate the cost of a substantial part of the work without first carrying out some domestic building work.

There are severe penalties for breaches of these provisions.

 3.13 VARIATIONS

The DBCA provides that, in most cases, variations may not be carried out unless and until all of the following steps have been taken:

 the proposed variation is described in a written notice; and

 the notice states

o the reasons for the proposal;

o the effect of the variation will have on the work under the contract;

o whether any permit will need to be varied;

o a reasonable estimate of any delays that may be involved in proceeding with the variation;

o the cost of and the price for the variation; and

 the owner gives a signed consent to the variation attached to a copy of the notice

Unless a variation falls within one of the permitted exceptions, a failure to follow the above sequence will deprive the builder from any legal right to be paid the amount he would otherwise claim for the variation; and in some instances it will deprive him from the right to any payment for the work in question altogether. 

3.14 CLAIMS FOR PAYMENT

The Act severely restricts the timing and the amount of the claims that a builder may make during and on completion of the work.  The “default” method specified for payments is on a “stage completed” basis.  The work on a new home is divided into the following stages under the statute:

1        base stage

2        framing stage

3        lock-up stage

4        fixing stage; and

5        completion

Each stage is defined in the Act; and the maximum percentage of the contract price that may be claimed on completion of each stage is also specified.  In addition, no payment may be claimed (or received) by builders with respect to any stage unless and until that stage is 100% completed.

The parties may agree to use a different set of stages (sometimes referred to as “Method B”), but only on the following conditions:

 there must be good and sufficient reasons for deviating from the above method; and

 the owner must read and sign a warning notice and a consent notice6 before agreeing to use a different method; and

 the different stages used must be sufficiently clearly defined in the contract.

One instance of the good and sufficient reasons is where the standard stages are not applicable – for instance in alteration work.  It must be remembered that, if challenged by an authority, the builder should be able to give convincing reasons why a deviation was necessary. 

Whenever an independent expert certifier – such as an architect – is involved in the administration of the contract, the legislation appears to permit a deviation from the staged payment regime; and allow the certifier to protect the consumer’s legitimate interests instead. This enables architects to use the traditional “percentage completion” method for assessing progress and authorising payment.  Having said this, the strict letter of some provisions is at odds with this intention, and would seem to outlaw the “percentage completion” method altogether.  It must be noted however that the authorities have so far not sought to assert this strict interpretation. 

3.15 RESOLVING DISPUTES  

3.15.1 VCAT

All disputes arising from or under domestic building contracts are defined as “domestic building disputes”.  These include not only disputes between builders and owners, but also those between builders and their sub-contractors, suppliers and consultants - as long as the disputes concern contracts for domestic building work.  The principal forum for resolving all domestic building disputes is the Victorian Civil and Administrative Tribunal [“VCAT”].  

If a party refers a domestic building dispute to a Court instead of VCAT, then the other party is normally entitled to apply to have the matter struck out by that Court . Such applications are in the main successful; and the originating party will then have to pay the costs involved in the futile litigation.  If that party then still wants to go ahead with the claim, it must start again in VCAT.

3.15.2 BACV

Despite the above, an additional process for dealing with parts of domestic building disputes was introduced in 2002 by amendments to the Building Act. This process is known as Building Advice and Conciliation Victoria [“BACV”]; and is managed by CAV and the Building Commission. The process is not intended to replace the VCAT processes, only to complement them – by attempting to resolve or refine, by advice and conciliation, some disputes before they are referred to VCAT.  When the process is successful, a reference to VCAT may become unnecessary.

It consists of the following steps:

1. A  matter is referred (usually by a consumer) to the CAV‟s conciliation service.

2. The conciliator notifies the other party and encourages both parties to reach a settlement.

3. If a settlement is reached, it will be put in a legally enforceable form.

4. If a settlement is not reached and the dispute involves matters of expert judgment, it is  referred by CAV to the Building Commission

5. The Building Commission appoints an independent expert, from a pool of such experts, to inspect the disputed matters of fact, to prepare a report and to make recommendations as to appropriate action where warranted.

6. The Report is forwarded to the parties.

a. Any recommendations to the effect that the builder is to carry out rectifications become directions of the Building Commission; and the builder is obliged to comply with these. 

b. Non-compliance is regarded as a failure to comply with a direction of the Building Commission, and will be referred to the BPB‟s disciplinary processes, usually with dire results for the builder.

c. The findings of the same Report are, however, not binding on the owner. 

7. In any event, the Report will be evidence in any subsequent VCAT proceedings.

It is very important to remember that you can always cut short and terminate the BACV process by taking the dispute to VCAT.  If you think you want to do this, it is advisable to do it before the BACV expert report has been prepared; since once it is done, the reference to VCAT will generally not stop the BPB actions referred to in item 6(b) above!

Builders may also initiate the BACV process.  However, unlike their clients, they will be charged for this service. This aside, the following other considerations would make the wisdom of such a move questionable:

 Both the CAV employees and the independent experts will note and report any breaches of any statutory provisions that they may encounter in their dealings with the parties and the documents; REGARDLESS of whether these are relevant to the dispute.  Then the authorities (CAV and/ or the Building Commission) will prosecute the offending party (usually the builder) in the Magistrates Court.  The BPB will also become involved, as noted earlier. 

 As noted, the expert report is binding on the builder but not on the owner.

See also Chapter 1 

3.15.3 Alternative Dispute Resolution [“ADR”]

This term covers private methods for resolving disputes by methods, rather than by litigation in Courts or Tribunals set up by Parliament. These include arbitration, mediation, conciliation and expert determination. Prior to the proclamation of the DBCA arbitration was a commonly specified method for dispute resolution in all types of building contracts. 

However, section 14 of the DBCA states that 

“Any term in a domestic building contract or other agreement that requires a dispute under the contract to be referred to arbitration is void.”

This was initially interpreted as a total ban on the use of private ADR in domestic building disputes.  Later Court decisions made it clear that the ban applies only to compelling either or both of the parties to use ADR. Therefore it is quite legitimate to refer any dispute, after it has arisen, to ADR if, and only if, both parties agree to this.  Of course they must then also agree on the details of the process, and ensure that the outcome will be binding and watertight.  

It must be remembered that once VCAT starts to deal with a matter, the first step will be an attempt to mediate under the stewardship of the Tribunal. Having regard to this, and to the difficulties in setting up an agreed and effective private ADR, one questions the value of that option in domestic building disputes.

3.16 TRANSPARENT TIMETABLE 

The legislation requires that, as far as it is practicable, the contracts must give owners a clear, accurate and binding account of the builder’s anticipated performance of the contract as regards timing.   

As a result, the contracts must contain the following information:

(a) When will construction work start on the site?  

This may be done by specifying a calendar date – or by stating the start date with reference to the fulfilment of certain conditions precedent (such as the issuing of all necessary permits).  The second option is by far the most prudent one; and it should be the one used unless the builder has weighty reasons for doing otherwise.

Note that, whenever the second option has been chosen, the builder must notify the owner in writing of the date on which work actually started on site. 

(b) When will the work be completed? 

This, too, may be specified as a calendar date, or by specifying the “contract period” – namely the number of calendar days that may elapse between the start date and the date on which completion will be reached.  Again, it is unnecessarily risky to name a specific date (i.e. option 1).

When the second option is used, the notice advising the owner of the actual start date must also specify the associated completion date (calculated as the actual start date plus the “contract period”) 

(c) What allowances have been included in the contract period?

Builders must explain the derivation of the length of the contract period.  This must include:

 the number of working days required (and included) to carry out all of the works; plus

 the number of non-working days included – these being all intervening Saturdays, Sundays, gazetted public holidays and any other days on which the builder will not be operating; plus

 the number of delay days (provisionally) included in the total contract period for reasonably estimated delays due to

o inclement weather and consequent conditions;

o the type or nature of the work; and

o other foreseeable causes.

3.17 DISTINCTION BETWEEN THE BUILDER’S STATUTORY WARRANTIES AND  

THE “WARRANTY INSURANCE”. 

There is a great deal of confusion concerning these two matters; principally caused by the shared word “warranty”. They are, however, very different things. Before turning to the differences, what does the word mean?  In its present use it means a binding promise by a person (the warrantor) that something will be done in a certain specified way; and if it turns out that the promise is not fulfilled in all respects (or at all) then the promisor will ensure that any gap between the outcome promised and the outcome achieved is filled at his or her cost.  

3.17.1  The builder’s warranties

Put in very simple terms, the legislation entitles owners to have all defects, and all consequential damage, rectified at no cost to the owner: namely by the builder or by others at the builder’s expense. The above entitlement lasts, in most cases, for a period up to 10 years. 7  The six-year period mentioned in the current “warranty” insurance policies is totally irrelevant here.    Six years happens to be the maximum length of time during which the insurance company will come to the owner’s aid if – and only if – enforcement of the warranty from the builder has become an impossibility due to the builder’s death, insolvency or disappearance.  

7  If legal action is commenced concerning any particular alleged defect or defects in a Court or VCAT before the expiry of the 10 years, then the 10-year limit will not apply to items found to be defective as a result of that litigation.

8  As sensible builders will have included the cost of obtaining the policy in question in their tender/contract price; ultimately they do not bear the cost of the premium.

9  The date on which these periods start to run is the same as for the builder’s 10-year liability.

Therefore, when faced with a request to rectify defects after completion, the focus of the builder’s enquiries should not be how long ago the work was completed (unless it was more than 10 years earlier); but the following questions:

Note that the head contractor’s responsibility and liability to the owner extends to rectifying all defective materials or workmanship provided by its suppliers and subcontractors. However, the suppliers or subcontractors in question may, in turn, be responsible and liable to the head contractor. To a large extent this will depend on the contents of the agreements the builder has with those suppliers and subcontractors. Builders are encouraged therefore to consult a construction lawyer about these agreements, to ensure that they contain the necessary provisions. 

The 10 years start to run on the date of issue of the Occupancy Permit where this permit is required, and on the date of issue of the Certificate of Final Inspection in other cases.   In the very rare cases where neither an Occupancy Permit nor a Certificate of Final Inspection have been issued, the trigger date will be the last day on which work was carried out.

3.17.2 “WARRANTY INSURANCE” POLICY

It would be better to call this the “required insurance” policy mandated by the legislation.  It is a policy issued by an approved insurer for the benefit of the owner; and it has no relevance to the builder’s obligations.  The builder’s only associated obligations are that it must

 hold eligibility for obtaining this insurance for its clients; and

 obtain, pay 8  for and deliver the policy relating to each contract to the client in question.

Once this is done, the insurance policy in its current form has no further application to the builder or to the builder’s obligations to the owner.  Typically, the policy will cover (to a maximum total of $200,000.00) the owners and successor owners with respect to the cost of rectifying the builder’s defective work 

 for six years in the case of defects defined as “structural,” and 

 for two years in all other cases.9  

However, none of that cover is available to the owners unless and until the builder 

 is dead; or

 is insolvent; or 

a) Is the alleged defect really a defect?  (Or is it some imperfection within acceptable tolerances having regard to the circumstances? Those circumstances may include the elapsed time: for example peeling exterior paint would be a defect after six months, but probably not a defect after 7 years).

b) If it is a defect, is it attributable to defective materials or workmanship provided by the builder under the contract? (Or is it attributable by some materials supplied or installed by the owner or by some third party, and thus not part of the builder’s contractual obligations?)

c) Is the observed deficiency a result of some unauthorised interference with the builder’s properly completed work? (For example, the builder should not be held responsible for the water-tightness of a roof, if subsequently someone else installed – say - an air conditioner over that roof, with penetrations made in the roof for supports, pipes, ducts, wiring etc; without the builder’s knowledge and consent.  Similarly, if a “defect” is the result of neglect or abuse by owners or occupiers.)

 has disappeared.

In so far as the builder is alive, solvent and traceable the policy is irrelevant: it is of no use or effect. In all of these cases the owner’s rights and the builder’s obligations are governed only by the legislation – in particular by the section 8 “warranties” – and the owner must seek redress directly from the builder.

Chapter 4 - Understanding, preparing and executing the contract 

You need to know and understand each contract before you enter it; as it will govern your rights and obligations during and after the work, and it will dictate the way you may or need to conduct your operations.  

Meanwhile, there are some general rules that apply to most building contracts. One of their principal parts is a fixed text, which sets out the conditions considered necessary by the drafters for that type of contract. There is always another part, which is for the parties to complete in each case with the details that apply only to that particular contract. 

4.1 FIXED TEXT 

You need to remember that, generally speaking, the “fixed text” is not necessarily fixed. It is open to the parties to agree (if they wish) to delete, add to or modify these provisions. Deletions may be done by crossing out all of the words not required, and having each deletion initialled by each party.  Additions or modifications may be done through the insertion of “Special Conditions”.  

Usually contracts will contain some blank space for inserting Special Conditions. By the way, any blank spaces that are not used should always be crossed out and initialled.  This will prevent fraudulent insertions later.  Whenever Special Conditions are being considered, a construction lawyer should be consulted first; in order to identify and help avoid any unintended legal consequences.   This is of particular importance when a special condition seeks to modify the standard text.

Having said this, some of the fixed text in major domestic building contracts is mandated by the law; these may not be deleted or modified in any way without offending against the DBCA.   Consulting with your construction lawyer will avoid the making of such a mistake.

4.2 DETAILS PECULIAR TO THE CONTRACT 

This part of the contract is sometimes called “Appendix”, at other times “Schedule” or “Annexure”.   In any event, it contains spaces that the parties themselves must fill in with the facts that apply to, and the details negotiated and agreed for, the contract in question.

The factual information includes the names, addresses and contact details of all the parties; the address and Title particulars of the land, and a concise description of the proposed work.  Typical examples of such descriptions would be:

o “erection of a new 20-storey apartment block;” or

o “construction of a new double-storey solid brick home;” or

o “extensions to existing brick-veneer residence;” or

o “repairs and improvements to existing kitchen and bathrooms”  etc.

The balance of the Appendix will usually include the following items:

(a) The contract price.  You must ensure that you always: 

 either insert the GST-inclusive price (whether or not you identify it as such; or 

 (if you insert a GST-exclusive price) you clearly state next to it:  “plus GST”.  Otherwise you will not be permitted to add GST later and it will have to be borne by you (unless the contract is exempt from GST)

(b) The deposit;

(c) The commencement date (the date on which construction work is to start on the site);

(d) The date for completion; 

(e) The Contract Period (expressed as the number of calendar days that will expire between the Commencement Date and the Date for Completion).  Note that the DBCA compels builders to include in this period a reasonable number of delay days of certain specific types (such as delays caused by inclement weather) and these must also be inserted in the Appendix. 

(f) Agreed damages payable to the owner for delays in reaching completion. These are usually called “liquidated damages”.  If any such damages are agreed, they should be based upon the realistic likely costs to the owner in the event of delays.

(g) Damages may also be agreed to compensate the builder for delays caused by the owner. These are sometimes called “reverse liquidated damages. These should be based upon the realistic likely costs to the builder due to any such delays.

(h) There will usually be schedules for Prime Costs and Provisional Sums. The parties need to consider whether they want to insert any items of provisional allowances. If so, they must agree and insert what these items are and, how much provisional allowance will be included in the contract Price for each of them.  They also need to agree on the percentage to be added for the builder’s margin on any adjustments to these allowances, and insert that percentage. 15% is not unusual.

Major domestic building contracts must also include a mandatory Checklist. This must be read, completed and signed by each owner; and the Checklist page must also be initialled by the builder and by each owner. 

4.3 INCLUSIONS 

The actual agreement between the parties comprises not only the text and the Appendix discussed above but also a number of other documents, which set out the scope of the work to be done.  They are primarily the architectural and engineering drawings specifications and schedules, and the engineering computations upon the basis of which the contract price was calculated and agreed.  

In order to ensure that these will, in fact, form part of the binding agreement, the following steps must be taken:

 Details of each drawing must be inserted in the Appendix.  These details must include  

o the name of the architect, engineer or draftsperson who prepared it; and 

o the date shown on the drawing; and  

o the drawing number – including the amendment number (for example drawing no “AR 345/C/1”).   

 Sufficient details of all other inclusions must also be inserted in the Appendix so that the document in question can be clearly identified.  These details would typically include the title of the document, the author’s name, the date and any document number appearing on the document, and the number of pages. 

 When the contract is executed  

o each drawing must be signed and dated by each party; and 

o the front page of each other document must also be signed and dated by each party; and  

o each page of each other document must be initialled by each party. 

4.4 EXECUTION 

Two identical sets of documents must be prepared and executed.  These are called “counterpart originals”.  Each set must comprise the “contract” (namely the printed text and the completed Appendices), and a copy of all the other inclusions that form part of the contract - as discussed above.

Each party must sign and date the execution clause (often called “Instrument of Agreement”) in the contract. Note that section 31(2) of the DBCA states the following:

“A major domestic building contract is of no effect unless it is signed by the builder and the building owner (or their authorised agents).”

In other words, any missing signature will make the contract unenforceable. This is nothing short of a disaster for the builder (and usually not too good for the owners, either). Therefore you must never neglect to sign the Instrument of Agreement in both counterpart originals, nor overlook any failure by any of the owners to do the same.

Each party must also initial each page of the “contract,” and deal with the inclusions as set out in item 2 above.  In addition, the DBCA requires that owners read, acknowledge and sign a number of mandatory warning notices inserted in the text and elsewhere in the contract. Builders must ensure that this is, in fact, done.  

Finally, builders must ensure that they give the owners “a readily legible signed copy of the contract”.  In reality you need to give them one of the full, executed counterpart original contract sets.  Section 25 requires this to be done 

“as soon as is practicable, but no later than 5 clear business days, after entering into [the] domestic building contract…”

Since any non-compliance is subject to a penalty of 20 units plus one unit for every day of delay beyond the 5 clear business days10, it will be prudent to ensure that you comply, and that you also obtain signed and dated receipts for this from the owners.

10 At the time of writing, this equates to some $2,400 plus $120 for each day

All of this sounds – and is – tedious; but whenever a required signature or initial is missing, owners will be able to claim that the contract was not properly executed, or that they had not knowingly agreed to the terms (or the drawing or whatever), in question. Having the documents fully and properly completed and executed will avoid such unwanted, unnecessary and very tedious complications. 

4.5 AFTERWARDS 

The counterpart original is extremely important set of documents. It will constitute the primary evidence of what was agreed by the parties in any dispute that may arise during construction or afterwards – right until the expiry of the 10-year period following the date of the Occupancy Permit.

You need to ensure that your set is kept safely and in a pristine condition during all of that time. Do not scribble on any of the papers or drawings forming part of the contract.  Use something else for these purposes.

CHAPTER 5 – INSURANCES 

5.1  INSURANCE MANDATED BY THE LEGISLATION (“REQUIRED INSURANCE”) 

Unless an exception applies, the Building Act requires builders to obtain for, and provide to, owners an insurance policy of a specified type whenever the price of a domestic building contract is greater than $12,000.00.  Note that if the initial contract price is below this threshold, but subsequently reaches or exceeds it due to variations, the builder will need to obtain a policy as soon as the adjusted contract price reaches $12,000.00.

The details of these policies are specified in Ministerial Orders, which are published from time to time in the Government Gazette. The policy that is currently specified must provide protection to owners for non-completion of the contract and/or for rectification of defects to a total amount of 200,000.00.  This cover must apply to non-structural defects for a period of 2 years and to structural defects cover for a further 4 years. These periods start to run on the date of issue of the Occupancy Permit, or on the date of issue of the Certificate of Final Inspection - whichever is applicable.

This type of insurance is often called last resort insurance, because it operates only if one of the following events has taken place:

 the builder has died (if an individual); or

 the builder has become insolvent; or 

 the builder has disappeared.

As noted earlier, this means that in all other cases owners need to turn to the builder – and not to the insurer - whenever an alleged defect is observed by them. If any dispute arises concerning responsibility for the alleged defect or as to the satisfactory rectification of an admitted defect, it can only be resolved through the Building Advice and Conciliation Victoria service (BACV) or by reference to VCAT.  In the main, both parties tend to incur considerable expenditure in time and money whenever they need to resort to these measures.

5.2  EXEMPTIONS 

 Multi-storey, multi-unit developments 

are exempt from the requirement for the above insurance. (See Item W).   Therefore it is important for intending purchasers in multi-unit developments to check whether the units they are about to buy are in fact covered by defects warranty insurance. 

 Owner-builders  

are also exempted from the requirement to obtain this insurance – but only so long as they do not sell the homes in question before the expiry of the prescribed period.  That period is currently six years and six months.  If they wish to sell the homes any earlier, they must first:

(a) obtain a report on the building from a prescribed building practitioner.11 These reports must

11   Note however, that requirement (a) does not apply to those owner-builders who are also registered building practitioners.

o contain matters that are set out in Ministerial notices published from time  to time in the Government Gazette; and

o be produced no more than 6 months before the owner-builder enters into the contract to sell the land (or building); and

o have been be supplied to the intending purchaser; and 

(b) obtain a required insurance for the unexpired portion of the prescribed period; and

(c) give the purchaser a certificate evidencing the existence of that insurance; and

(d) include the section 8 warranties in Sale of Land contract.

Any contract for the sale of the property which is entered in contravention of the above requirements  is voidable at the option of the purchaser at any time before settlement!

 Other exemptions

A person who enters into a major domestic building contract with a builder for the construction of more than 4 homes may, with the consent of the builder, apply in writing to the Director of Consumer Affairs Victoria to exempt the builder from the requirement to be covered by the required insurance in respect of that building work.

There are other specific exemptions in the Building Act but these are of very limited application, and are therefore outside the scope of this publication. 

5.3  ALL BUILDING PRACTITIONERS ARE REQUIRED TO BE INSURED 

Section 3 of the Building Act defines a building practitioner as being any one of the following:

   (a)  a building surveyor; 

   (b)  a building inspector; 

   (c)  a quantity surveyor; 

   (d)  an engineer engaged in the building industry; 

(e)  a draftsperson who carries on a business of preparing plans for building work or preparing   documentation relating to permits or permit applications;  

(f)   a builder including a domestic builder;  

(g)  a person who erects or supervises the erection of prescribed temporary structures; 

(h)  a person responsible for a building project or any stage of a building project and who belongs to a class or category of people prescribed to be building practitioners;  

but the definition excludes-

o architects; and 

o persons (other than domestic builders) who do not carry on the business of building 

All building practitioners must be registered with the Building Practitioners Board. [Architects are subject to separate legislation;12  under which they must register with the Architects Registration Board]. 

12   The Architects Act 1991

The legislation requires all registered building practitioners to be insured in one way or another. We have already dealt with the insurance mandated for domestic builders.  A separate warranty insurance scheme is prescribed for commercial builders; this will not be discussed here. 

Practitioners registered in the design categories (categories “a” - “e” above) must hold Professional Indemnity Insurances (“PII”), which are also specified in Ministerial Orders.  The current scheme requires these practitioners to be covered against claims for not less than one million dollars. This is an annual claims based policy. 

Only natural persons can be registered under the Building Act; and each registration must be renewed annually. The registration will not be renewed unless the practitioner has a current mandated insurance policy; and it will be effectively suspended (or terminated) as soon as the practitioner ceases – for any reason - to have a current policy. 

A company (or a partnership) will be permitted to carry out building work if – and only if – at least one of its directors (or one of its partners) holds a current registration in the category of the work in question. In such cases the insurers will base their decision about providing the required insurances, and on the conditions under which they will do so, on a combination of the characteristics of the registered director and of the company (or partnership).

The carrying out of any building work without registration of the relevant kind is a prosecutable offence; and any breach is punishable by a fine of up to $60,000.  Similar provisions apply to any representation that a person is registered, or that any person or company or partnership is qualified to carry out building work of any given kind, when this is not true.

5.4  OTHER INSURANCES 

Builders are also required to hold other types of insurance.  Some of these are also legal obligations, arising from more general type of legislation -  such as Work Cover.  Many other insurances are specified in the contracts the builders enter – such as contract works policy and  public liability policy for each job. Of course, it would be most imprudent for builders not to have these policies, anyway. 

Other insurances builders are likely to need include policies for vehicles, tools and equipment, all risks insurance for surrounding property and so forth.  However, these are outside the scope of this paper.

In many building disputes the building malaise emanates from a combination of poor workmanship and poor design. Sometimes there has been negligent certification carried out by the building surveyor. In such circumstances multi-defendant legal proceedings are issued against the building practitioners. Such

proceedings are by definition expensive.

5.5  APPLICATION OF PROPORTIONATE LIABILITY 

Under this liability doctrine, no defendant/party is liable to pay any more than his/her/its judicially determined percentage. If for instance a residential builder is held liable for 50% of the cost of the defects, then that is the extent of that party’s obligation to pay. It is thus paramount that all accountable and responsible “actors” are judicially brought to account. Otherwise the owner/plaintiff may be left bereft of a sizeable chunk of the cost of rectification. The initiation and assumption of conduct of such proceedings requires considerable skill and care and the deployment of construction lawyers is paramount.

As all building practitioners are required to be insured by law the owner is more or less guaranteed of payment once a case against a practitioner has been successfully prosecuted.

Building litigation, however, is not for the “faint of heart”, nor is it for the “poor man”. Building actions cost a great deal of money, by and large take a large amount of time to resolve and are both financially and emotionally debilitating. In a good many instances cases are fiercely contested.

5.6  THE PERIOD OF TIME BY WHICH ONE CAN ISSUE LEGAL PROCEEDINGS 

The Building Act provides that one can initiate a building action within 10 years of the issue by the building surveyor, of an occupancy permit or a certificate of final inspection. The causes of action are limited to cases occasioning economic loss.

Public liability claims are exempted. 

Ten years hence, the ability to sue for economic loss is, without ceremony, “guillotined”.

CHAPTER 6 – IMPORTANT TIPS FOR SUCCESSFUL CONTRACTING 

6.1  ALWAYS NOMINATE ONLY ONE PERSON TO DEAL WITH YOU 

Clients will often be couples, groups or companies. 

It is critical that one person is always nominated to liaise with you. That person may be one of the clients, or an employee or a consultant of the client.  The important thing is that the nominated person – and only the nominated person - is authorised to give notices and directions to you and to receive queries and communications from you.  Otherwise you are likely to be given conflicting responses or instructions; resulting in chaos.

For similar reasons, it is equally important to ensure that no-one – not even the authorised person – is permitted to communicate directly with any of your employees, subcontractors, suppliers or consultants.  The authorised person needs to communicate with these persons exclusively through you – or at least only in your presence.  Anyone else has no business to communicate with them at all.  It is not enough to ensure that clients are made aware of this rule; you must also ensure that all your employees, subcontractors, suppliers and consultants are acutely aware of it and toe the line. Any breach this obligation should be treated with sufficient severity to discourage repetition.  

6.2  DO NOT INITIATE VARIATIONS UNLESS UNAVOIDABLE 

Any change to the scope, nature or character of the work set out in the drawings, specifications and other parts of the signed contract are called variations. 

Almost all variations will have an impact on both the contract period and the contract price. Mostly the impact will be an increase to the price, to the contract period or both.  In some cases an amendment of the Building Permit will also be required before such a variation may proceed; this will involve further delays and costs.

Variations constitute one of the major sources of disputes. Parties will often argue about whether 

o compliance with a particular request or instruction constitutes a variation (or should it have been included in the builder’s quoted price); or

o there was any need for a suggested variation; or

o the particular changes were appropriate solutions to the situation prompting them; or

o the price for the variation is appropriate and/or has been authorised by the owner

or in an ideal world, neither party should seek variations. 

The greater the number of variations, the greater the cost blow-out and the greater the stress that will brought to bear on the project.

It is for this reason that the drawings and the specifications should be prepared with great care and precision. The less ambiguity in terms of design documentation, the lower the potential for variations, i.e. by you and the owner.

Never entertain a variation unless you do so in a fashion that complies with the DBCA. Ensure that the variation is in writing, is accurately scoped, described and costed, and then work out the impact on time. Next, get the document signed by both parties.

6.3 ADHERE TO THE TERMS OF THE CONTRACT STRICTLY 

The DBCA is a consumer oriented Act of Parliament. It is not designed to protect the builder, rather the converse is the case, and it is designed to protect the owner.

Nothing illustrates this more rapidly than the plethora of statutory penalties in the DBCA. Not one of those penalties contemplates any untoward dealing on the part of the owner, as it is only the builder that can be fined under the act. For instance, if the builder enters into a building contract for more than $5,000.00

without executing a MDBWC, it is the builder who can be prosecuted and fined, not the owner.

Likewise if the contract is for more than $12,000.00 and the builder doesn’t carry compliant insurance cover again it is the builder who can be prosecuted. The later provision makes sense as the insurance regime is designed to protect the owner, not the builder.

It is nevertheless curious that the onus of rigorous contractual compliance under the DBCA falls  exclusively and fairly and squarely with the builder. Curious in the sense that owners can from time to time take advantage of builders by for instance, refusing to pay them, part paying or refusing to recognise a variation form. Yet the owner engages in contractual “skull-duggery” there is not one section in this comprehensive Act of Parliament that imposes any penalty on the owner.

It is thus critical that builders comply with the DBCA and its legislatively mandated contractual provisions to the letter. If they do not they can find themselves in a parlous position.

6.4  ENSURE YOU GET PAID AS SOON AS – BUT NO EARLIER THAN – YOU ARE ENTITLED TO IT 

The contract ordinarily will have payment conditions that spell out the time junctures for payment. What is unusual about the DBCA is that the legislation dictates the times upon which the builder can be paid. These junctures are spelt out in section 40 of the DBCA.

Have careful regard to the definitions of words like base stage, frame stage and lock-up stage and fixing stage. None of these stages would have been completed until every legislatively defined component has been completed. Below is a definition of each stage.

"base stage" means:

o In the case of a home with a timber floor, the stage when the concrete footings for the floor are poured and the base brickwork is built to floor level; 

o In the case of a home with a timber floor with no base brickwork, the stage when the stumps, piers or columns are completed; 

o In the case of a home with a suspended concrete slab floor, the stage when the concrete footings are poured; 

o In the case of a home with a concrete floor, the stage when the floor is completed; 

o In the case of a home for which the exterior walls and roof are constructed before the floor is constructed, the stage when the concrete footings are poured; 

"frame stage" means:

the stage when a home's frame is completed and approved by a building surveyor. 

"lock-up stage" means:

the stage when a home's external wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed (even if those doors or windows are only temporary).

"fixing stage" means:

the stage when all internal cladding, architraves, skirting, doors, built-in shelves, baths, basins, troughs, sinks, cabinets and cupboards of a home are fitted and fixed in position.

Note that the end of what would be the “final stage” is not similarly defined.  As a result of this vagueness in the legislation, the question of when the builder is entitled to claim – and receive – the final payment has led to a multitude of bitter and expensive disputes. Under one extreme interpretation, the work will not reach “completion” until the owner agrees that there are no remaining defects or incomplete items. Fortunately the VCAT tends to take a more sensible attitude and accept the works as completed – for the purposes of final payment – when:

o the occupancy permit (or, where applicable, the Certificate of Final Inspection) has been issued by the Relevant Building Surveyor and a copy supplied to the owner; and

o copies of all applicable mandatory certificates of compliance (electrical, plumbing, glazing etc) have been supplied to the owner; and

o there are no known defects or incomplete items remaining that cannot be rectified without undue interference with the owner’s substantial enjoyment of the benefit of the works provided under the contract.

CHAPTER 7 - KEY ACTIVITIES, TERMS AND JARGON 

7.1 PLANNING PERMITS 

Legislation, headed by the Planning and Environment Act 1987, requires in many situations that, before any other activity, a planning permit must be obtained for a particular proposed project.  The question of whether or not a planning permit is required in any given case is complex.  It may happen for example that no planning permit is required for certain building work on a parcel of land, but it is required for identical building work on the abutting land.  For this reason owners and builders must take positive steps to ascertain whether a planning permit is or is not required in each case.  Since planning permits may only be obtained from the municipal authority in which the land in question is located, one reasonably safe way of ascertaining the answer is by asking the local planning officer to advise you of the answer - in writing.  Planning consultants and lawyers specialising in planning matters should also be reliable sources.   

Whenever a planning permit is required, no valid building permit may be issued unless and until 

 a valid planning permit has been issued; and

 all conditions that may be stipulated in that permit have been satisfied by the scheme submitted for the building permit.

7.2 BUILDING PERMITS 

It is a serious offense under the legislation to carry out any building (or demolition) work without the necessary, valid and current building (and/or demolition) permit.

 The general rule is that building permits are necessary for any activity involving building and construction activity; and demolition permits are required for any activity involving removal of any components or other items associated with buildings. There are a small number of exemptions from this requirement, but the scope of these is limited. Before you decide that an exemption applies to the work you are contemplating, you must obtain expert legal advice to confirm or deny this.  

 A building permit is current only within certain time limits.  Unless the validity is extended in time, work must commence by a specified date and be completed by another specified date. These dates are shown on the permit document.

7.3 RELEVANT BUILDING SURVEYOR [RBS] 

Building permits may only be obtained from professionals who are registered by the Building Practitioners Board in the category of building surveyor.  Consumers now have a choice between engaging a private building surveyor or a municipal (council or shire) one.  Furthermore, if you choose to engage a municipal building surveyor, it need not be from the municipality in which the land is located.

Note that a building surveyor may only be engaged by the owner or the occupier of the land; and the resulting relationship is confined to these parties.  It excludes the builder. Builders may only engage and instruct building surveyors as agents of the owners or occupiers.  For these reasons it is unlawful for builders to engage building surveyors unless they have a signed written authority to do so from the owner or occupier in question.  Builders who neglect to obtain this authorisation are subject to substantial fines.

Once a building surveyor has been engaged for a particular project or scheme he or she becomes known as “the relevant building surveyor” [RBS] for that job, and will issue the Building permit when satisfied that the building – if constructed in accordance with the submitted drawings and specifications – will comply with all legal requirements. The RBS is then normally expected to oversight the whole project and to eventually issue the Occupancy permit (or the Certificate of final inspection)as required by the Building permit issued by him or her.  Changing from one building surveyor to another is not normally permitted; it may only occur with and subject to the Building Practitioners Board’s prior written consent.

7.4 OCCUPANCY PERMITS AND CERTIFICATES OF FINAL INSPECTION 

The Relevant Building Surveyor must normally issue an Occupancy permit when, in his or her expert opinion,  a new building has been completed  to a standard where it is safe and fit to be occupied and used for its intended purpose. 

It is unlawful for anyone to occupy any new building without an occupancy permit; and offending owners are subject to prosecution and fines. 

The date shown on the occupancy permit is the date on which time starts to run with respect to warranty insurance policies, and also with respect to the 10 year limitation on commencing legal action arising from the contract or any of its works.

Sometimes – notably where a building contract involves alterations, extensions or additions – an occupancy permit will not be required.   On completion of these works the Relevant Building Surveyor must issue a “certificate of final inspection” instead. This certificate will, in these cases, be treated in the same way as the occupancy permit for the purposes discussed in this section.   

Building surveyors must lodge a copy of each Occupancy permit and Certificate of final inspection with the local Council. It needs to be remembered however that these permits and certificates do not in themselves constitute conclusive proof that everything was actually built in full accordance with the drawings, the specifications and all the relevant laws.

Note that the issuing of the Occupancy permit or of the Certificate of final inspection (as the case may be) is not the same as “completion” for contractual and statutory purposes.  The statute specifies “completion” as the stage when:

 the work has been completed in accordance with the plans and specifications 

AND

 the Occupancy permit (or the Certificate of final inspection) has been issued.

Under the legislation builders are not entitled to make a final claim – or to receive any amount for the completion stage – until the above criteria have been satisfied.

7.5 FIXED PRICE CONTRACTS 

The legislation requires that – save for certain limited exceptions – the prices of all domestic building contracts be fixed lump sums.  This means that the agreed contract price specified must cover all of materials and labour to be provided by the builder under the contract; and that it may not be changed otherwise than permitted under the statute.

Note the following: 

 Despite the “fixed price” tag, the contract price may be changed (varied) in several permitted ways.  These include variations to the contract, adjustments of any Prime cost items and of any Provisional sums that may be included in the contract. The legislation specifies the circumstances in which these changes to the contract price may be made, and also the steps that must be taken in order to make the changes permissible.   

 Often some of the work shown on the building permit documents will not form part of a contract between a builder and the owner.  It may be that the owner wants to let a separate contract for (say) all of the landscaping work. Sometimes the owner may want to do some of the work him- or herself.

o In such cases the builder’s contract must clearly specify all work that is excluded from the contract (and therefore also from the contract price); otherwise the builder may be obliged to carry out that work as well,  at no extra cost. 

o Similarly, the building permit must be issued to reflect any division of responsibility; usually by breaking the permit into the appropriate “stages” and showing who is responsible for each of these. Otherwise the builder will be unable to obtain an Occupancy permit (or Certificate of final inspection) – and thus final payment -  until the last contract is completed; and will also be held responsible for any defects in the work of the other contractors. 

7.6 COST PLUS CONTRACTS 

These are the alternative to fixed price contracts. The DBCA forbids the use of Cost Plus contracts for domestic work, except in two circumstances:

 where the reasonably estimated cost of the completed work will be at least $500.000.00; or

 where the work involves alterations, extensions, repairs (etc) to existing buildings and it is not reasonably possible to estimate the full extent of the work involved until some work is done first.

Essentially a cost-plus contract is an agreement that the owner will cover whatever the builder’s costs turn out to be (provided that the expenditure is properly documented),  plus an agreed margin for the builders overheads and profit.  There is no upper limit to the final price in such contracts; therefore owners should not enter them lightly.

Note:

 the reasonable estimate must be made at the time the contract is entered and be based on the information then available;

 the $500,000.00 lower limit is subject to change by Ministerial Order;

 care should be exercised before relying on the second exception, since entitlement to do so is based on somewhat imprecise criteria.

7.7  VARIATIONS 

Any change to the scope of the work after the execution of the contract is a variation. These may include changes to the quality, the dimensions, the type, the level, the position, the method of installation, or any other characteristic of any materials, components or processes; as well as any requirement or need to add to or delete from any of the work forming part of the contract. 

It is important to ensure that, before variations are carried out, the owner and the builder agree to each variation and also agree on the associated variation price. The legislation requires that (except in limited circumstances) this prior agreement is documented in a written authorisation signed by the owner.  

7.8 PRIME COSTS [PC] AND PROVISIONAL SUMS [PS]  

These terms and their meanings cause much confusion. They are sub-sets of the “family” sometimes referred to as provisional allowances. These are amounts (allowances) included in the contract price of fixed price contracts, to nominally (provisionally) cover the anticipated cost of certain components which form part of the contract, but whose price – for one reason or another -  cannot be calculated accurately at the time when the contract is entered.

7.8.1 PRIME COST [PC] ITEMS

Some provisional figures refer (only) to the cost of purchasing and delivering certain products, materials or other goods.  These allowances are defined in the DBCA as “Prime Cost Items” and therefore we will adopt the same definition. 

These allowances need to be included for products where the exact number and/or type had not yet been decided when the contract is entered. For example the full details of the door- and window-hardware and furniture are rarely decided by owners this early in the process, but the design, material, colour, finish, master-keying etc. characteristics of each item are variables with significant influence on the price.  Similar considerations often apply to plumbing fittings, light fittings, kitchen equipment and so on. Unless special circumstances apply, however, the cost of fixing these items in position on the site can be calculated in advance even without knowing the full characteristics.  Therefore the cost of fixing/installing is already included by the builder in the fixed (non-provisional) component of the contract price.

Once the goods included in a PC have been selected and purchased, the contract price will be adjusted to cover the difference (if any) between the actual cost of purchase and delivery of the goods and the PC originally allowed for that item.

7.8.2 PROVISIONAL SUMS

There are other instances, where the cost of installing, fixing or otherwise providing a component is incapable of being ascertained at the time when the contract is entered.  The provisional allowances in these cases must nominally cover the cost of such fixing or installing (that is: the labour involved) or, in some cases, the entire cost of providing the component in question (that is: supply, delivery and labour).  These are termed Provisional Sums [PS]. 

For example, an air conditioning installation may not have been fully designed or specified at the time the contract is entered – here a PS amount will be included to cover the full cost of all materials and labour that will be involved. Once the design is completed, a single subcontract can be let for providing and installing the whole system, and the PS adjusted accordingly.

7.8.3 NOTES: 

 The DBCA stipulates that all the amounts included as provisional allowances by the builder must be reasonable under the circumstances at the time of pricing the contract. If challenged, the builder may need to demonstrate to the authorities how he derived those allowances and satisfy them that these processes were reasonable. 

o Oftentimes provisional allowances are made (that is: determined for inclusion in the contract) not by the builder, but by the owner or by one of the owner’s consultants. Naturally, the builder cannot be held responsible for the reasonableness or otherwise of those allowances.

 The DBCA also requires the builder to provide to the owner copies of all invoices, receipts or other documents relating to the actual costs of provisional allowances “as soon as practicable” after the builder receives those documents. 

 Since these provisional allowances are adjusted against the actual net costs incurred by the builder, the builder should also be entitled to adjust the contract price by a corresponding margin to cover its overheads and profit pertaining to the difference. This margin is expressed as a percentage of the net adjustment, and that percentage must be agreed on as part of the tendering or negotiating process. The agreed rate must be inserted in the contract before it is signed. 

By way of example:  

§ The PC for the gold taps is $800.00; and the builder’s agreed margin is 10% for any excess cost. 

§ The owner later selects taps which cost $1,000.00 each to purchase.  

§ The builder is then entitled to have the contract price increased by $330.00 for each tap.  [Actual price; less PC allowance; plus 10% of the difference.] 

 The greater the number of PC and PS allowances included in a contract, the greater is the opportunity for the contract price to increase.  Therefore it is in the owner’s interest to minimise the number of these allowances in the contract – otherwise the notion of a “fixed price” can become illusory. In fact, by turning all material components into PC items and all labour components into PS items, a fixed price contract can be effectively transformed into a Cost-Plus contract.

7.9 INCLEMENT WEATHER 

In plain English this term means “bad weather.” In the building industry it refers to weather conditions that interfere with the builder’s ability to progress the work as and when planned.  The most common instance is wet weather, which makes certain outdoor activities – such as earthworks or excavating and placing footings - difficult or impossible. However, inclement weather can include excessively windy conditions, and sometimes also very hot weather. For example, standard concrete slabs should not be poured in temperatures over 35 degrees C, as the strength of the resultant product will be impaired.

It is important to remember that inclement weather is not relevant unless it actually interferes with the process.  Internal painting, for instance, would not normally be affected by rain, wind or heat.

Another delaying factor can be “conditions resulting from inclement weather”.  A common example occurs when heavy rain has stopped, but the trenches are still full of water and need to be pumped dry before any real work can resume inside them.

7.10 REGULATIONS  

The Building Regulations 2006 are authorised by and supplementary to the Building Act 1993, and form the “nuts and bolts” part of the regulatory scheme governing building and construction activities in the State.  All work must fully comply with all of the relevant regulations.  Non-compliance is a defect.  The Regulations also incorporate, by reference, the Building Code of Australia and, through this, a large number of Australian Standards. 

7.11 BUILDING CODE OF AUSTRALIA [BCA] 

The BCA is a uniform national document that specifies minimum acceptable technical and performance standards for the design, manufacture and assembly (or construction) of buildings, building materials, equipment and other

components. Note that, despite the national nature of this document, most states (including Victoria) have added their own “supplements” containing additional provisions; and these also apply in the state in question.

7.12 AUSTRALIAN STANDARDS [AS] 

Standards Australia Ltd is charged by the Commonwealth Government to meet Australia’s need for contemporary, internationally aligned standards and related services. It publishes a vast series of technical standards for a large variety of industrial, manufacturing, commercial and other activities. These are called Australian Standards, and are designated with the letters “AS” followed by a number. For example, AS 1684 is the code for Residential Timber Framed Construction.

The BCA includes a list of Standards which are considered relevant to setting the technical and performance requirements for buildings. Compliance with the Standards so specified is mandatory whenever they apply to any work. Non-compliance will constitute a defect.

CHAPTER 8 – WHEN THINGS GO OFF THE RAILS 

Sometimes projects don’t go according to plan. In our experience the vast majority of building disputes are traceable to the following causes:

 Lack of rapport between the contracting parties;

 Confused and confusing channels of communications;

 Interference by owners in a manner, or to an extent, which is inconsistent with proper conduct of the project;

 Defective work;

 Incomplete work;

 Not carrying out work in accordance with the plans, specifications, permits or the applicable laws; 

 Too many variations;

 Variations that were not

o costed correctly; or 

o accurately described; or 

o documented in writing as and when required; or

o signed by  the owner as and when required.

 Late payment, short payment or non-payment of the builder’s entitlements;

 Advance payments.

Where any one or more of these circumstances arise, the project can be placed in jeopardy. As soon as any of these problems occur you must, at the earliest opportunity, seek the services of a construction lawyer. It is essential to ensure that you consult an experienced construction lawyer; because only they have the background, knowledge and experience to deal with the peculiar nature of building disputation. It is not an area of law that sits comfortably with lawyers who do not have this specialised experience and expertise.

The construction lawyer will examine your legal position and options; and will make recommendations regarding the course of action that is likely to be in your best interests. 

In dire circumstances it may be necessary to suspend or even terminate the contract. However, these are complex processes fraught with danger; if they are done incorrectly they will boomerang and hit you on the head.  In this connection you must remember: DO NOT MENTION, let alone start, any suspension or termination without first consulting a construction lawyer. The very act of saying that you intend to suspend or terminate can, in many circumstances, already amount to a repudiation of the contract by you; and this will enable the owner to end the contract for your default and to collect the associated damages from you.

Most contracts contain very comprehensive default, suspension and termination protocols. These procedures must be religiously observed, to the letter. Otherwise you will, again, find that you had unwittingly committed an act of repudiation.

Ordinarily you will first have to issue a Notice of Default. The notice must refer to and describe one or more of the default grounds that are specified in the contract as entitling you to issue such a Notice. Next the Notice must state a period of time (which the contract nominates) for the owner to rectify the defaults listed; together with a warning that in the event of any failure to rectify all of the defaults within that time you intend to use your right to suspend - or terminate (as the case may be) – the work under the contract.

You must then ensure that the Notice is served exactly in accordance with what the contract requires for such notices.  Sending a Notice by ordinary mail for instance, will be fatal to your case, if the contract states that this particular notice must be served by registered post (only).  

If the defaults are not rectified within the designated number of days, then you will be entitled to suspend or end (as the case may be) the contract in accordance with the follow-up methodology set out the contract.

As mentioned, this whole area is fraught with risks, and the slightest mis-step will have the opposite result to what you had intended.

To graphically illustrate how things can go terribly wrong we will tell the story of a lay couple who took the matter of contractual termination into their own hands. We had first-hand experience of this matter; as one of us acted for the builder.

The builder’s contract had been terminated. The owner had become frustrated with the builder, because he had formed a view that the builder had under-quoted on the job and was cutting corners in order to make up for this. (We never learned whether or not this was true, because the dispute was eventually fought on different grounds.)

What was on point was the fact that on a particular day the owner screamed at the builder “get the f*#% off the building site and don’t f*#%ing well come back, and if you don’t do it immediately, we’ll get the police to evict you”. 

The owner then engaged another builder to finish the job. Inevitably this ended up costing a good deal more than the balance of the original contract sum.  In fact, many tens of thousands of dollars more. The owner then engaged a reputable law firm to sue the builder to recover these extra costs.  If the builder’s contract had been lawfully terminated, for genuine defaults or misconduct, the owner would have been entitled to recover those costs.  The critical question was: did the owner terminate the contract lawfully or not?

Two years later the matter went to trial.

When we filed our defence we pleaded that the owner had not terminated lawfully and, by doing so unlawfully, he had in fact repudiated the contract by conduct. The foul language was pleaded verbatim to illustrate the unceremonious and unambiguous nature of the owner’s disregard of all reasonable processes. We argued that such language and such emphatic direction evinced an intention to no longer be bound by the contract; and that, in turn, constituted repudiation. This argument proved successful.

 At trial the owner’s solicitors had briefed an instructing lawyer and a highly experienced barrister. Meanwhile the builder chose to represent himself in person; such was his confidence.

The builder’s legal point was a simple one. He said that the owner had wrongfully terminated the contract, by emphatically forcing him from the building site, and by making it clear that he was not to come back.

The contract had contained termination provisions similar to those mentioned above; requiring articulation of the default, written notification of same, and the nomination of a period for the builder to rectify the default. Finally the contract required the notice to specify that, once that period expired, the owner could/would terminate the contract if the default had not been rectified. Instead of following these contractual steps, the owner saw fit to go about ending the builder’s employment in a petulant manner entirely alien to the contract. The owner’s attempted termination of the contract was therefore found unlawful, and the builder became the wronged party.  The net effect of all this was that the owner could not recover from the builder any of the additional completion costs as he had hoped to do.  Instead, he had to pay the costs of two years‟ litigation, which would have come to some $150,000.00.

The moral of the story is: don’t even consider terminating (or suspending) a contract unless you first deploy an experienced construction lawyer.

CHAPTER 9 – DISPUTES AND THEIR RESOLUTION 

In many building disputes the building malaise emanates from a combination of poor workmanship and poor design. Sometimes there has been negligent certification carried out by the building surveyor. In such circumstances multi-defendant legal proceedings are issued against the building practitioners. Such proceedings are by definition expensive.

Building litigation, however, is not for the “faint of heart”, nor is it for the “poor man”. Building actions cost a great deal of money, by and large take a large amount of time to resolve and are both financially and emotionally debilitating. In a good many instances cases are fiercely contested.

9.1  DOMESTIC BUILDING DISPUTES 

The legislation declares that all disputes arising from a domestic building contract are domestic building disputes. However, some contracts which are otherwise not defined as domestic building contracts (such as those involving registered architects, engineers, draftspersons and other professional consultants; and also all sub-contracts) are also considered domestic building contracts for this purpose. Therefore disputes arising from those contracts are also defined as domestic building disputes if the building in question is a domestic building. 

9.2 PROPORTIONATE LIABILITY