Things you need to know when negotiating a building contract

 Posted on: 16 April, 2015
 Mario Figliomeni


The following outlines points to look out for when reading through a building contract.

  1. Fixed price contract means that your price will be fixed once the contract is signed, apart from PC’s and PS’s. The builder’s price comprises all costs including the builder’s margin. This type of contract is generally preferred by banks when seeking finance.
  2. Cost price contract means that you pay for the costs of labour, material and a negotiated builder’s fee on top of the building cost. The problem with this type of contract is that it can be open-ended, as there is no fixed price to adhere to. Therefore banks do not generally lend on this type of contract.
  3. A PC, or prime cost, is basically an allowance within the builder’s quote for a material. For instance, an allowance of $40sqm for the supply of tiles. PC does not include labour, this is an allowance, thus if the tiles you chose are worth $50m2, you would have to pay the difference between the PC and the amoun that you actually spend.
  4. A PS, or provisional sum, is an allowance within a builder’s quote, which includes the cost of material, labour and builder’s margin. An example of this is site works. PS is used when you cannot give a fixed price due to unknown conditions. An example is, if  the earth worker finds rock that cannot be sited visually, this is an unforeseen situation and will impact on the PS allowance.
  5. Check the contract in regards to the costs of making changes to plans or addenda. After contracts are signed, will you be paying a percentage on top of the variation cost or a variation fee? Variation charge can be anything from $200 to $500, or both.
  6. Is it noted in the contract a construction start and finish date? If so, is it realistic?
  7. Is there a maintenance period specified within the contract? If so, the period should be a minimum of six months.
  8. Legally the builder can ask for a maximum of 6.5% of the contract value as a deposit, at contract signing.
  9. PPA means preparation of plan agreement, and is used when the builder needs to prepare documents prior to building contract. Part of the preparation includes completing working drawings, engineer details and site survey if required.
  10. The builder needs to provide indemnity insurance prior to receiving building approval. Indemnity insurance protects the homeowners in the event of the builder not being able to complete the construction due to bankruptcy.

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