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Building contract

Woman signs a contract as another woman looks onIt is very important to read the building contract thoroughly and get legal advice from your lawyer if you are unsure.

The building contract is a complex document and is generally made up of:

  • the building contract, including a Schedule of Particulars, Addenda or Appendix;
  • drawings; and
  • specifications.

Before you sign a building contract for work valued at between $7,500 and $500,000, your builder must give you a copy of a document called Notice for the Home Owner see Schedule 1 under the Home Building Contract Regulations 1992.  The notice summarises your rights and responsibilities under the Home Building Contracts Act 1991 and  when employing a builder. Where applicable, make sure you receive and read this document, as well as the building contract.

The law in Western Australia does not require that building contracts contain a cooling off period.

If the contract does not include a cooling off period, you cannot get out of a building contract because you have changed your mind.

Terms of a building contract

Generally, the building contract outlines the general rights and responsibilities of the builder and the homeowner. If you have any queries with any of the terms of the building contract, it is very important to consult a lawyer before you sign it.

It is also important to remember that the salesperson you speak with before signing the contract is generally not the builder, so make sure any promises made by the salesperson are in the contract.

Contracts that allow the costs of the project to be calculated as a "running tab" are called "cost - plus" contracts. Such contracts must be titled "cost-plus contract". As it is difficult to monitor and control the ongoing costs of a building contract, it is recommended that you think very carefully before entering a cost-plus contract and seek expert advice.

For most building contracts, a figure can be calculated (including certain estimates explained under "Payment details") for the total cost of the building project. Such contracts are called "lump sum" contracts.

Regarding the rest of the information in this section, we will assume that you have been given a lump sum contract for the building of your house.

More information

Payment details

The building contract usually includes a payment schedule. The schedule sets out how much building work must be completed before the next instalment or "progress payment" is due.

The first payment under the contract is usually a deposit and should be limited to the builder's initial costs. Under the Home Building Contracts Act 1991, for building contracts valued between $7,500 and $500,000, the builder cannot ask for more than 6.5% of the contract price as a deposit.

Before signing the building contract, you should check that arrangements for the release of progress payments are acceptable to you and your lender. The builder usually submits an invoice before a progress payment is due. Your lender may make the progress payments directly to the builder on your behalf.

Most contracts specify a total amount for the building work. Two areas where the costs are estimated in the contract are:

  • the cost of goods that you will select during construction (known as prime costs); and
  • the cost of work that cannot be known with certainty (known as provisional sums).

If the actual costs (including the builder's margin) are less than the estimated costs, the builder will pay you the difference. However, if the actual costs (including the builder's margin) are underestimated, you are required to pay the difference to the builder. Your builder must use reasonable care and skill when estimating costs in the contract.

Payment details and delays

In relation to building contracts, the builder can include a term in the contract that allows for prices to be changed if the builder faces or incurs an increase in costs if:

  • government taxes or charges increase after the contract is signed; or
  • a State or Federal government law changes and affects the builder's costs; or
  • work does not start on the project within 45 days from the signing of the contract (and the delay is not caused by the builder).

Inspections

Your builder cannot prevent you or your representative from inspecting the building work. However, you should ensure that you do not unreasonably interfere with the building work. In the building contract, the builder may seek your agreement to limit your inspections to normal working hours.

A date for completion

The building contract should also include the time limit to complete the house and the handover date. You may consider inserting a clause that allows for a penalty to be inserted if the date is not met (or a financial incentive for the early completion of the project). Any such term would need to be accepted by the builder.

Drawings and specifications

The drawings are the visual instructions or plans to the builder (and the local authority) about the measurements and features of the property being constructed.

The specifications are the agreed written instructions about the materials and building methods to be used to build the house.

If you have any queries or concerns about this part of the contract, you may consider employing an architect or draftsperson to give you some advice.

Building contract issues

It is recommended that the building contract includes all your final requirements about the building and  features of your house. You should check that your building contract covers matters such as:

  • the type and size of the hot water system, which satisfies your requirements;
  • the type and location of light, gas and TV fittings;
  • a provision for site works;
  • the method for termite prevention treatment;
  • the number and location of power points and taps;
  • the extent of tiling;
  • the crossover (where the driveway on your land meets the verge); and
  • whether any surfaces are to be painted and the quality of paint to be used.

More information

For more information about building a house call Consumer Protection on 1300 30 40 54.

Case study - not the right time

Jonas wanted a new home to be built on a block of land he bought and signed a contract to the value of $180,000 with a local registered builder, Dave. Jonas chose Dave because he had a good reputation for building quality homes in the area and Jonas could talk easily with him about the project. The local authority (council) approvals were given and work was due to commence on schedule.

Jonas had already chosen the bricks he wanted for the home. There had been a lot of building work going on in Western Australia and Dave thought it was a good idea to order the bricks without delay. Unfortunately, Dave was unable to buy bricks because there was a massive shortage. It was likely that Dave would have to wait two months before he could be assured of supply.

Dave found out that he would have to pay more for the bricks once they were available and would also face increased costs of bricklaying. Dave met with Jonas as soon as possible to explain the situation.

Jonas understood that the delays and price rises were not Dave's fault and he had to think carefully about what to do. Dave explained to Jonas that under WA law, Jonas could terminate the contract, as it was likely that the increase in the contract price would be more than 5% of the original contract.

Jonas and Dave agreed to terminate their existing contract. Jonas decided he would consider the state of the building industry in six months' time and hoped to enter into a new building contract with Dave at this time.