Your Essential Guide to Building Contracts

A building contract is a legal agreement between a builder and client that states all the costs involved in completing the building project. For smaller home improvement projects, these costs can be relatively basic and include time (labour) and materials only. As projects become larger and more costly, though, building contracts become more complicated. Here's your essential guide to building contracts.

Types of Building Contracts

As a rule, the more expensive a project is, the more complicated a building contract should become. To help ensure that contracts suit the scale and complexity of the projects, different types of contracts have been designed for different building price ranges. Typically:

• "Small jobs" contracts are designed for building projects valued at between $1,000 and $5,000.
• Jobs over $5,000 require more extensive "home building" contracts.

A small jobs contract requires only basic information, including the date; signatures of both the contractor and client; a brief description of the work to be carried out; the contractor's license number; and the price (if known). A home building contract is far more extensive and must include further information, including:

• An detailed description of the work to be carried out.
• Attached plans and specifications and a statement that work will be carried out according to the plans.
• A clause stipulating that any variations on the contract, plans, and/or specifications will be made in writing and signed by both the contractor and the client.
• If any prices are unknown, they must be stated in the contract, along with an explanation for why they are unknown.
• In New South Wales, if the price of the contract exceeds $20,000, the builder must also include a statement about their legal obligation to hold Home Warranty Insurance. Other States have similar requirements for insurance that covers the client in the event the contractor does not complete the job.

A "fixed price" contract is the easiest to understand, but it is not always possible for a builder to offer a fixed price nor is it always to the client's advantage. For these reasons, other contracts can be entered into:

• "Cost plus" contracts agree to reimburse the contractor for all expenses incurred during building (labour, materials, outside subcontractors, etc) plus a fixed percentage of the cost or a fixed fee. A cost plus contract should include an estimated price; a timetable for reporting costs; and an accurate means of tracking labour and materials costs.
  
  
• A "design and construct" (D&C) contract includes costs of both designing and constructing a building or home addition. It can be either a fixed price or cost plus contract. D&C contracts often also include "prime cost" items such as lighting fixtures and kitchens. These can be adjusted if the owner later decides to get more or less expensive prime cost items. Some D&C building contracts also include "rise and fall" clauses to cover the fluctuating prices of materials and labour.

Understanding building contracts before you need them is a great way to prepare for getting quotes. It can help you prepare a detailed brief of your project for contractors to quote on and help you negotiate prices after you have received your initial quotes. If you've been given a fixed price quote, for example, ask the builder for a cost plus quote and compare the 2. Fixed price contracts are often higher than cost plus contracts because the builder adds a "buffer" for some costs they can't fully anticipate ahead of time.

Once the contract is signed, you are committed to it, so be sure you know exactly what you are signing first. Read every contract you receive thoroughly before you sign it. If there are any grey areas or things you don't understand, don't hesitate to ask the builder for clarification and to revise the contract if necessary. Start off on the right foot with your building contract and you are far more likely to be satisfied with the end result.