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Investors who undertake developments or subdivisions need to understand building contracts and payment schedules.
Blogger: Darren Standish, Property Prosperity
The building contract usually includes a payment schedule. The schedule sets out how much building work must be completed before the next installment 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 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.
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.
It is important that you fully understand your rights and responsibilities when entering into the contract to ensure that your finances will allow you to complete the project.
It is essential that you engage the services of an experienced Mortgage Broker and/or Builder Broker to ensure that the expected construction costs are well within your budget.
About Darren Standish
Darren Standish established Property Prosperity in 2004 initially as a property development company, however after repeated requests for assistance the business evolved into a development consulting business.
Property Prosperity was initially focused on assisting clients with subdivisions and negotiating with councils to ensure that clients maximized their return on investment. Over the years additional services were gradually added to ensure the development process was as seamless as possible for its clients. We expanded into offering individually tailored finance solutions and then added Property Development Analysis, Property Sales and a Builder Broker Services.
Darren is the overachiever of the team and has more qualifications than your average university graduate. As well as completing a Bachelor in Economics, Bachelor in Commerce and post graduate in Accounting he subsequently went on to complete a Diploma in Financial Service, Diploma in Real Estate and Certificate IV in Building. He is a qualified Certified Practicing Accountant (CPA), a licensed Real Estate Agent, licensed Mortgage Broker and holds a Builders License.