Are you about to undertake the building contract stage of your residential townhouse development project but are unsure how home-building contracts work?
Well, stick around because, in this article, I will break down the types of contracts and precisely what you should be looking out for.
Let’s get into it.
When discussing build contracts here in Victoria, before we get stuck into the specifics, I want to acknowledge the two most common contracts that we use are either a Master Builders contract or an HIA contract.
It is essential to point out that we don’t find much difference between them; it’s usually whichever one the project builder we have engaged is aligned with.
Here are three points of interest for us at Little Fish when engaging in these types of contract negotiations.
1. Payment Schedules
First up are the payment schedules.
The two main payment schedules in either of the two contracts I just mentioned will be your method A or B schedule.
The Method A Schedule is a standard schedule with the schedules broken down into stages.
The Method B Schedule is a schedule that allows you and the builder to customise the payments.
Here at Little Fish, we find that this method is a great way to keep the cash flow strong on your job and keep your builder moving.
Ultimately, it’ll come down to the best schedule for your project and the subdivision builder you’ve engaged with.
And ensure that your builder is confident he can achieve a successful outcome under these parameters.
As the property developer, you must ensure the builder has cash flow. Don’t be afraid of this; embrace it – as you both need to work towards a successful outcome together.
2. Liquidated Damages
Secondly, let’s talk about liquidated damages.
You must understand liquidated damages to negotiate the terms correctly with your builder.
It’s essentially the remuneration you will receive if the project runs over the agreed amount of time – accumulating daily.
If you don’t negotiate the terms, it will revert to default terms, which, in most cases, will be in suffice.
There are many different measures in calculating the correct number; one we have used in the past is considering the potential rent you would be forgoing for the dwellings if they weren’t completed on time.
Ultimately, it needs to be a number that both parties are happy and content with because it’s also important to note that liquidated damages work both ways.
As the property developer, if you slow down the builder, liquidated damages can be claimed against you.
So please don’t go too hard, as it does swing both ways.
3. Defect Liability Period
And finally, we would look closely at the defect liability period.
This defect liability period in your home building contract isn’t something you necessarily negotiate with the builder; it’s just a clause in these contracts that you need to be across – it will help you sleep better at night, trust me!
Upon the builder completing the builds, and as the client, you can provide your duplex builder with a defects list. They will then be required to complete this list.
The defects liability period from the builder is typically three to six months, 3 to 6 months. Depending on your contract. If any defects arise in this period, the builder must rectify them.
This also means you don’t have to stress when completing your initial walk-through. If you miss anything or anything else arises, your builder is responsible.
Then, once you or your buyers move in, I usually tell clients that unless it is ruining their life. Make a master defects list you can share with your builder to complete just before the defect period ends.
This will minimise the burden on your life going back and forth and around in circles. Get it all fixed up in one fell swoop.
That’s it when it comes to your home building contract. If you need help getting development ready. We offer property development consultation and project management services, so don’t hesitate to contact our expert development team.
If you are going at it alone and are in the process of locking in your contractors then check out these questions to ask your builder.