Hiring a builder

What is a building contract?

A contract is a binding document between you and your selected builder. It outlines the rights and responsibilities of both parties. A contract helps ensure you and your builder agree to the costs, timeframes, and expectations for your building work.

While there is no requirement in ACT legislation to enter into a written contract for residential building work, it is strongly recommended.

A contract can provide clarity about:

the construction of your new home
your rights and obligations during the building process
guidance as to how the parties are to go about certain things, such as:
- variations
- extensions of time and
- dispute resolution.

Having a contract in place can help avoid potential disputes regarding the building works or processes.

Before you start

Know your builder

Check the builder’s credentials

For work that needs a licensed builder, ensure your builder has the right licence class for the building work that will be undertaken.

Search builder licences.

Shop around

Approach different builders and obtain at least 3 quotes to ensure you get the best value for your investment. Remember, the cheapest quote is not always the best value.

Look at their work

Ask potential builders for details of similar past work and recent clients. This helps confirm they can provide the level of service you’re expecting for your investment.

Do your research

You might consider looking into the history and structure of the builder or building company, such as:

undertaking company searches
checking the disciplinary register to see whether compliance action has been taken against the builder or directors.

Make sure to get as much information as possible.

Signing a contract

Know your limits

Building and renovating can be expensive, so know your budget and stick to it. Picking out your appliances, benchtops, flooring, and other fixtures is fun. Remember that the higher the quality, the higher the cost, so keep this in mind. Consider having some extra funds set aside in case of unforeseen circumstances that result in additional costs. Ensure you can pay the deposit and progress payments when they are due. If you are financing your project through a lender, understand what their requirements are as part of releasing funds for progress payments.

Read and understand your contract

Read the contract and make sure you fully understand all the clauses and know your obligations well as your rights.

Get independent legal advice if there are clauses and terms in the contract that you are uncertain about or if you would like to add or change anything in the contract.

Know what's important to you

The contract should attach your building plans and identify which features of the work are most important to you. Specify your inclusions, even if they are only small items, so they can’t be changed without your agreement. As an example, this could include:

Higher quality tapware or specific cornice you want to be used throughout.
Needing a particular paint or paint colour to be used.

Not specifying means the contract may allow the builder to change room dimensions or substitute products that are not acceptable to you.

Communication is key. Your builder won’t know your wants or needs unless you tell them. It’s also best to identify and decide on these items prior to signing a contract. That way you may be able to avoid extra cost to change your contract while the building is being built.

Check for any cooling-off periods

There is no mandatory cooling-off period for building contracts in the ACT. Make sure you are ready to enter into the contract before you sign, as you may not be able to change your mind without a penalty under the contract.

What’s in a contract?

There are many types of building contracts. Your builder may use a standard residential building contract from their industry association or have a lawyer draft one.

Generally, a contract for residential building work should contain

The exact names of the homeowner and builder, the address where work will be carried out and the date and signatures of both the builder and homeowner.

Details of the builder’s licence and any insurance policies the builder holds.

A detailed description of the work to be carried out, including:

attaching any plans and specifications
who handles obtaining the relevant approvals
the contract price, if known, or clear explanations of any costs that are not known or subject to change
a start date and a completion date for the work, including allowances for obtaining relevant approvals.
clauses that clearly explain the process for varying the contract, including any plans and specifications, extensions of time, costs, etc. Most contracts require variations to be in writing and signed by both parties (you and the builder).
a progress payment schedule that outlines the payments to be made following the completion of specified stages of work. The stages of work and the amounts that must be paid at these stages should be clearly described.
a clear and precise description for practical completion and the maintenance (or defects liability) period, and what is expected of you and the builder during this process.
a simple dispute resolution process that enables you and the builder to attempt to resolve any issue or dispute between you and the mechanisms for doing so.
a termination clause states when a contract may be terminated and what each party’s obligations are on termination.

The contract may also include special conditions. Some builders use industry association standard contracts. These are designed to apply to various residential projects. If your builder uses a standard contract and it includes special conditions, check these conditions carefully and make sure you are getting the protections you need.

Deposit

There is no limit on the initial deposit for the work in the ACT. However, industry practice is usually up to 10% of the total contract price. This is typically paid in advance as security for the builder and for payment toward initial material costs.

When negotiating the deposit amount, consider that the maximum amount you can claim back under the insurance for the project is currently $10,000 if the work is not completed. Apart from the initial deposit, it is good practice for a progress payment to include only payment for work already completed. Check the contract carefully to see if this is stated.

Approvals and appointing a building surveyor (certifier)

Some building work requires a building approval. An independent building certifier must be appointed to consider the building approval application and to inspect the building work at certain times during the project. As the landowner, it is your responsibility to appoint the certifier.

A residential building contract must not include clauses that give the builder the right to appoint the certifier or to act as your agent in dealing with the certifier. You can agree for your builder or another person to appoint the certifier, but this must be in a separate written agreement. The contract should say who is responsible for obtaining other approvals, such as a development approval, that may be required.

Find out more information about approvals.

Common sections of the contract and terminology

Builder’s margin

This is essentially the builder’s fee. The percentage provided in the contract will apply only in certain circumstances, such as for variations and contract termination. It is used to calculate the dollar amount that is added on to other costs for those changes.

Example
Ravi enters into a building contract with Jenny to renovate the ensuite in their home, and the contract has a builder’s margin of 18 per cent. Ravi wants to amend the bathroom fittings, resulting in a 3-day delay in construction works and additional costs of $1,500 for the goods. Under the contract, Jenny can add the additional cost of the builder’s margin, plus the cost of the goods, to the next progress payment.

This would be calculated as:

Additional costs x builder’s margin in the contract
= Total cost for bathroom fittings
= $1,500 x 18 per cent = $270

Therefore, the total cost of the bathroom fittings is $1,770.

Deposit and progress payments

A deposit is your initial payment to the builder to start the work. Progress payments are ongoing payments you make as the build progresses. Parties entering their own schedule of payments should seek legal advice.

Warranties and defect periods

Under ACT law, residential building work over the value of $12,000 carries statutory warranties even if this is not stated in the contract The Building Act 2004 states that work must be or will be carried out in accordance with the Building Act, in a proper and skilful way and in accordance with the approved plans.

There are different warranty periods for structural and non-structural elements of the building. Statutory warranties apply to the residence but do not apply to items such as paving, fences, retaining walls, outdoor swimming pools, ponds, and antennas. The contract may include additional warranties for the work or processes for identifying and resolving defects. The additional warranties do not limit your statutory warranties.

Insurance

For work over $12,000 on some residential buildings, your builder must have residential building work insurance or a fidelity fund certificate for the project before it can commence. Make sure you have a copy of the residential building insurance policy or the fidelity fund certificate. You should check the contract allows for fair termination if the builder cannot obtain the required insurance within a prescribed time.

You can also take out your own separate insurance if you choose. Homeowners warranty insurance will only cover up to $10,000 for deposits. This insurance is not residential building work insurance under the Building Act 2004.

Variation to building work and/or costs

Your contract should cover what will happen if you need to vary building works due to things like changes in local laws, errors in plans, or changes in the supply of goods. If needed, you can also request variations during the building work, but this may change the final cost. Always get any variations in writing. A builder can also refuse a client’s request for a variation in circumstances prescribed in the contract.

Finish date/practical completion

Your contract should include a date for when the work is to be completed and for the final building handover. The date specified in the contract is intended to be a guide and can be subject to change. Having an estimated timeframe protects both the builder and the homeowner. Your contract should outline the process to be followed when an extension of time is required.

Note that the contract will generally only have terms that compensate the builder. If you wish to be compensated for delays in construction, discuss this with the builder and get legal advice before entering into the contract.

Liquidated damages clause

This clause requires a builder to pay an amount back for each day late in completing the project, other than for “allowable” delays. For example, there might be an allowance for rain days included in the contract or delays caused by things outside the builder’s control or caused by you or people acting on your behalf.

Practical completion and lock-up stage

These are common terms used for different stages of the build that do not necessarily mean that all work is finished. The lock-up stage is generally when the building can be effectively locked up, but there is still work to be done to internal and external areas to complete the work.

Practical completion is when the building is complete or almost complete in accordance with the contract but for some minor work or fixing defects. While most contracts refer to practical completion as the finish date, some don’t, so check your contract carefully to ensure you understand when the building and contract are complete.

Termination clauses

Make sure that you are familiar with the termination clauses of the contract, including those that may require you to pay an amount to the builder.

Seek legal advice if you feel that the clauses do not give you enough protection.

Complaints and disputes

It is important you raise any concerns with your builder as soon as possible. If a dispute arises between you and your builder, the building contract may have resolution processes in place to help resolve these matters and prevent them from escalating. It is important that you understand what these processes may require before you enter into the contract. It is important to keep records of complaints and responses from your builder, as this may be required later should the issues not be resolved.

You can also ask the builder to explain their complaints policy and processes to you and ask for a copy of any written policy.

If the dispute resolution process in the contract does not resolve the matter, you should seek independent legal advice about your rights under the contract. You can also seek information and advice from Fair Trading at Access Canberra (phone 13 22 81) to help you understand your rights under the Australian Consumer Law.

Important things to remember

Make sure you are using a licensed and insured builder where required.
Get legal advice if you are not sure of your rights and obligations and make sure the contract includes any special requirements you may have.
Ensure you are given a copy of the signed contract as soon as possible after signing it.
Get regular updates from your builder and record the progress of works.
Always get any variations in writing.
Talk to your builder if there is a problem.

You should seek independent legal and financial advice on any building contracts you are considering.