Understand your Building Contract to Avoid Budget Blowouts
A Contract is a Contract.
Without a doubt, the most common mistake made by people when they enter into binding building contracts for the construction of their dream home is:
– Not reading it thoroughly, and/or
– Not fully understanding what it means.
Unfortunately, when it comes to the law, neither are an excuse.
A contract is a contract – and that is the end of the story. For this reason, being entirely clear about what every single word and phrase really
means is essential, because in the case of a building contract, dream homes can often turn into nightmare budget blowouts.
When it comes to a building contract, the parts that most commonly catch out those who sign them relate to costs. That’s because even if the deal is
a so-called ‘fixed price’ contract, that doesn’t mean the price is guaranteed.
Why? It’s all about two terms: ‘Provisional Sum’, and ‘Prime Cost’.
When building contract budgets blow out, it is almost always due to differences between the values set out in the contract, and the actual real-life hit to your wallet.
You can also watch this video:
*Let’s take a look in more detail:*
Firstly, the definitions. Provisional Sum is an estimate of what it will cost to do an aspect of the job, when it is not possible to know the precise amount beforehand. For instance, if a site has to be excavated, it’s not always possible to know what the excavators may find beneath the surface.
Prime Cost is a budget for products or items within the project, like $5000 for stone tiles or $1000 for taps. This allows a budget to be made without needing to know the exact style, brand and model of taps straight away.
In other words, we’re talking about best guesses.
While builders are legally obliged to try to be as accurate as possible, there are some things you need to know about these contract items. Firstly, to secure the contract, a builder may try to make their estimate as low as is possible in order to make the overall price of the budget as low as possible. But in this case, the risk of being caught out is high…for both parties.
In part, this is often your fault without even having realized it in the first place, because when your project is in the contract phase only, you just want the price to be as low as possible. But when it’s time for those taps to go into your dream home, suddenly you may not be quite as happy with the ‘no frills’ ones the builder has budgeted for.
And when you consider that among those Prime Costs are light fittings, toilets, sinks, light switches and so on and so forth, it’s easy to see how the costs can blow out by the thousands. Some builders even make scaffold and other large parts of the project Provisional Sums. Their price looks good at first but if they haven’t allowed enough for it or if that item goes up in cost….you pay the difference.
So if you’re not prepared for the potential extra costs, they can really bite you. That’s because it’s not only your last-minute desire for frilly taps that can be a problem. In fact, if a builder is having trouble sourcing a product or the cost of excavating the land in order to lay the foundation has gone up, they don’t even need to consult you before putting the price up.
And this also works the other way around, too: if the total budget for the project simply cannot be exceeded, the builder may downgrade the expected quality of materials and labour to get the price down, resulting in sub-standard workmanship.
There is no excuse for not reading, reviewing and revising the contract before you sign it, making sure you understand what everything could mean in the real world rather than on paper.
At Yates, we pride ourselves on providing one of the most comprehensive building contracts in the Brisbane luxury home building industry, so to find out the critical questions to ask your builder before signing anything, click here.