A modest to large house could take about 12 months to build and involve 70 to 80 tradespersons. The slightest problem or variation can cause delays and cost increases. If we accept there are elements of risk in all building projects, the question is: who is to take on those risks?
The basic premise of all construction contracts is one of risk sharing; for instance who is to take the risk of an increase in the price of certain materials? The contract allocates these risk items between the parties, a good principle being that the party who can best control the risk should take responsibility for it.
There are a number of pro-forma (standard) contracts available. In many cases they are drafted by organisations that are involved in the building and construction industry but some specific (larger, commercial) contracts are drawn up by the parties and their lawyers. Master Builders offers standard form contracts.
There is virtually no such thing as a fixed price contract, except perhaps for very small jobs.
The building industry uses two basic forms of contracts for the majority of projects: lump sum and cost plus. There are different forms of each, the choice usually depending on the nature of the work, personal preference or negotiation between the parties. Each has its benefits and shortcomings.
In simple terms, a lump sum contract establishes the contract price at the outset. There may be adjustments to this price where there are, for example, variations to the original work, or where there was work which could not be precisely prices at the start of the contract and for which a “provisional sum” has been allowed.
A cost plus contract provides for the builder to pass on to the owner the actual costs of the project, such as labour and materials, as they are incurred in the course of the work. The builder applies a margin or a flat fee to these actual costs to cover off-site costs and profits.
Added to this contract document which sets out the “agreement to build” and the general terms and conditions governing the parties’ relationship are the details contained in the various plans, specifications, addenda, engineers drawings and schedules. When combined, these form a suite of documents commonly referred to as “the contract set”.
Before entering into a contract it may be helpful to get an independent person to check all documents to ensure expectations are satisfied and that both owner and builder fully understand their obligations.
Acknowledgement: All Points Building Consultants (www.allpointsbuilding.com.au), August 2008.