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Fixed price contracts - Are they really?
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Author:  zenithconstructions [ Sep 19, 2006 10:05 am ]
Post subject:  Fixed price contracts - Are they really?

No.

No, no, no.

If you enter a fixed price contract, and you think that's the only money you will have to pay for your new home, you either need to spend a good few hours reading the contract from cover to cover, taking notes, or you need to pay a solicitor to do it for you.

A lot of the questions and concerns that I read on this site are because the consumer is not fully understanding what they are entering into.

Why is a fixed price contract not a fixed price contract?

As the consumer, you must understand building projects are both ambiguous and uncertain. This means that a certain amount of risk is taken on for every project we do. Contracts exist to allocate the risk to one party of the contract - either the builder, or the client - not both.

So, some houses will need a boundary survey done - but not all. To keep the base cost of the house down, the builder will make this an 'extra' to the contract price. If you need a survey, you'll have to pay it. If you don't - you won't!

I'm going to quickly skim through a 'fixed price' HIA NSW Residential Building Contract for New Dwellings (Copyright HIA Ltd) and point out a few clauses that may be result in an extra charge:

1. Clause 10: Survey of the Site
2. Clause 12: Hidden Site Conditions
3. Clause 13: Other Costs
4. Clause 14: Contract Price Adjustments
5. Clause 16: Interest on Late Payments
6. Clause 17: Variations
7. Clause 20: Specified Materials
8. Clause 21: Prime Cost and Provisional Sum Items
9. Clause 23: Risk
10. Clause 27: Final Certificate
11. Clause 37: Debt Collection Costs

As you can see, there are quite a few clauses where a claim for more monies may be forthcoming. The consumer and builder are both fully aware of all these clauses prior to signing a contract.

Author:  Elizabeth [ Sep 19, 2006 7:47 pm ]
Post subject:  A terminology question (lol and a few other q's)

Hi Zenith

Thanks for pointing these clauses out. We'll be using a solicitor to go over any contract before we sign, but it's good to know the kinds of things we need to be looking out for (we're in Victoria, but I assume the items will be much the same).

In the past, I have searched unsuccessfully for meaningful definitions of prime cost versus provisional sum items, to no avail. Would you mind sharing with the list your understanding of each of these terms, and in particular, how they differ?

I'd also be interested in hearing a little more about the HIA NSW clause 17 on variations. How do these usually work in a fixed price contract?

And finally, why on earth would anyone sign anything other than a fixed price contract? (I trust there must be a good reason, I just can't fathom what it might be!).

Thanks; love your work.

Elizabeth

Author:  zenithconstructions [ Sep 20, 2006 12:46 pm ]
Post subject:  Re: A terminology question (lol and a few other q's)

Hi Elizabeth,

Good to hear that you're going to run your contract past a solicitor. Someone else suggested to me that you shouldn't have to spend the extra money on a solicitor. In my opinion, unless you have substantial experience in contract law, you simply can't afford not to run ANY contract you sign past a solicitor!

To answer your questions:

1. Prime Cost: Refers to an allowance for the supply of an item. Provisional Sum: Refers to an allowance for the provision of a service. Example: I have allowed a Prime Cost (PC) allowance for you toilet of $300. I have allowed a Provisional Sum (often also incorrectly abbreviated as PC) for your excavation of $5000.

2. Under the HIA contract, and it is similar in most others, there is a specific protocol to follow in requesting a variation, whether the request is from the builder, or the owner. This should ALWAYS involve a request in writing, and approval is granted only after BOTH parties have signed it.
2. (a). A clause to be careful of (in the HIA contract it is 17.7 - the excerpt provided is Copyright HIA Ltd): The owner must not unreasonbly withhold consent to any variation which is required for the building works to comply with the law or a requirement of any statutory or other authority.
2. (b). If the builder requests a variation, that you do not feel you need to pay for, don't sign it. But be prepared to express to the builder why you feel you don't need to pay for it. Example: Builder: "I'm submitting this variation of $4000 because we had to make 600x400 footings instead of 400x300, according to engineer's instructions. The soil reactivity is greater than as was originally specified in the engineer's details that form part of the contract. Owner: "But I've signed a fixed price contract, I don't have to pay you this extra." Builder: "Please refer to Clause 17.7 of your contract - this is a requirement of your engineer, an authority who must sign off on the building". Owner: "I won't sign it" Builder: "If you do not sign it, I'll be forced to terminate this contract as per 33.2 (d): Owner interferes with or obstructs the progress of the building works". <-- This is where I'd stop speaking legalese, and TALK with the client. I can quote clauses all day long, but it doesn't get anyone anywhere - the thing that works in dispute resolution is COMMUNICATION.

3. Why would anyone sign anything other than a fixed price contract? There are a few reasons:

a) Your builder will generally accept a lower profit margin for cost plus. There are plenty of builders who only build cost-plus 10%. That may seem like a lot of money to you, I don't know. But most builders who work on those margins end up going broke.
b) Your site/designs are just too uncertain and ambiguous to fix a price to. There may be some parts that can be fixed, and these may be noted in the cost plus contract. Often we will have a labour 'cap' with our cost-plus contracts, because owners believe a builder will slacken off without the added incentive of a fixed price (not the case - I want to finish my jobs as quickly as I can, so I can move onto the next one). There are simply some houses you can't put a fixed price to - if you want it built, you have no choice but to sign CP.

Thanks for the comments on the work! I love it too.

Regards,

Andrew

Author:  Elizabeth [ Sep 20, 2006 1:52 pm ]
Post subject:  Thanks ... Cost plus 10%?

Hi Andrew

Yay! Thanks for such straightforward answers. I feel much more confident in what I'm talking about now.

One further question arises for me (sorry, but I suspect too few people ask for these sorts of definitions and I'm hoping this thread will be helpful for others in the future) ...

In general, what does "cost" mean/include in the context of "cost plus 10%"?

Regards

Elizabeth

Author:  zenithconstructions [ Sep 20, 2006 2:29 pm ]
Post subject: 

Happy to help Elizabeth. :D This thread will be here whilever the forum exists, and I love the fact that I have some knowledge that can help other people! There's nothing better than being able to get into the other party's shoes either.

A builder must give evidence of the 'cost' that he is claiming. I submit photocopies of every single invoice, and every hour of labour claimed. I encourage owners to keep a track of the hours my staff spend on site if they wish.

Cost = (Labour + Materials + Subcontractors + GST) x %Margin. In that order. The margin must be INCLUSIVE of GST.

Every single invoice must be presented to you, and you're within your rights to ask - 'What was this [insert item here] used for on this invoice dated [dd/mm/yyyy]?' Keep in mind tho, that this can end up costing more than it saves, because your builder can charge for his time - if it takes him an hour to find out what a $20 stick of timber was used for, was it worth the $50+ it will cost you? But, you might also ask 'What's this $2500 bill for Tyvek? What's that?' And you builder can immediately point to the white stuff your house is wrapped in :)

Building is all about being reasonable on both sides. I can be as tough as I need to be when it comes to contracts, but I much prefer to go around to a client's house, grab a cuppa and chat about things.

I'll go off an ramble here for a moment, because I want to give an example of my only major dispute so far:

I had only recently been employed by Zenith, and my boss had estimated a job for a cost-plus 12.5% contract, which was to be my first job. I was very green, and just assumed my boss had everything sorted. Well, he didn't.

The job was way underestimated. We estimated less than $300k. At the end of the day this particular job came in at around $430k if I recall correctly. Now, there were lots of reasons for this:

1. The scope of the job changed dramatically (big rock walls, big piers, extra concrete paths, extra joinery, extra ROOMS!), and no one ever kept track of the changes to scope. I believe that accounted for about 40% of the cost blowout.
2. The job was underestimated from the word go. It was estimated at $800/m2. We ended up getting it in for about $1100/m2. If I was to quote it today, I'd be pricing up around $1300-$1400/m2!
3. I was 'project managing' but I didn't have a clue. My boss dropped that one in my lap, and it was a great learning experience for me. The clients weren't very happy though.

So - what happened? Well, the fundamental problem was that the clients had signed a cost-plus contract, regardless of what we estimated it to be. And at the start of one of these contracts, in big bold letters it says, 'The final value of this contract is unknown'. So although they were not real happy, there wasn't a great deal that they could do legally.

Final outcome? We pretty much halved our profit on the job, shook hands, and both parties went away lighter in the pocket. The funny thing is, the project was a great success! It's a beautiful house (I'll try to get some photos) and $1100/m2 for an architecturally-designed executive home is very, very cheap!

So that's my essay. BUT, parting word: Go for a fixed price if you can - there are too many crap builders out there. If not, get an independent quantity surveyor to do an estimate for you, so that you can check it against your builder's.

Author:  JackIves [ Oct 03, 2006 9:47 am ]
Post subject: 

Thanks for the tips...about to get into this myself.

Author:  ms_platimum [ Nov 26, 2006 3:17 pm ]
Post subject: 

Does this apply to owner builders in particular?

Author:  Yamster [ Nov 27, 2006 8:00 pm ]
Post subject: 

hi zenith,

is there a way for consumers to put clauses in contracts to protect them from construction delays?

coz there seems to be alot of clauses in most contracts to protect the builder if the owners don't pay up, but not the other way around - if the builder don't do their work

Author:  zenithconstructions [ Dec 05, 2006 9:25 am ]
Post subject: 

Yamster Yamster
hi zenith,

is there a way for consumers to put clauses in contracts to protect them from construction delays?

coz there seems to be alot of clauses in most contracts to protect the builder if the owners don't pay up, but not the other way around - if the builder don't do their work


Hi yamster,

The best way to work with this is to make use of liquidated damages. This means that for every week late (past the contract completion date), the builder has to pay the home owner the agreed amount. Liquidated damages must be reasonable, however - usually this is set at the amount it would cost to rent a similar house, or service the mortgage, etc.

There are more drastic ways to make sure a builder completes a job, but this is your best bet.

Author:  dymonite69 [ Oct 31, 2008 8:56 pm ]
Post subject: 

zenithconstructions zenithconstructions
The job was way underestimated. We estimated less than $300k. At the end of the day this particular job came in at around $430k if I recall correctly. Now, there were lots of reasons for this:

1. The scope of the job changed dramatically (big rock walls, big piers, extra concrete paths, extra joinery, extra ROOMS!), and no one ever kept track of the changes to scope. I believe that accounted for about 40% of the cost blowout.
2. The job was underestimated from the word go. It was estimated at $800/m2. We ended up getting it in for about $1100/m2. If I was to quote it today, I'd be pricing up around $1300-$1400/m2!
3. I was 'project managing' but I didn't have a clue. My boss dropped that one in my lap, and it was a great learning experience for me. The clients weren't very happy though.

So - what happened? Well, the fundamental problem was that the clients had signed a cost-plus contract, regardless of what we estimated it to be.


We signed a fixed price HIA contract with allowances for prime costs/provisional sums.

We are now at 2nd fix stage five months after the work started. Last week we received (without warning) an invoice worth about $13000 in variations on underground main electricity, site excavation and site access driveway. The items represented 58 to 288% on the quoted prices. We were never told that there was likely to be additional work required and to our knowledge were not forewarned of any 'problems' with the site.

The HIA contract mentions that PCs and PSs should be a "fair and reasonable" estimate. I called SA consumer affairs who believe that a 50% increase could not be interpreted a "fair and reasonable" estimate and said we have no obligation to pay. We are asking our builder for invoices now but I was wondering how the courts interpret the above wording? Aren't there penalties to builders for grossly underestimating work or not exercising "reasonable care" to do so.

Author:  Casa2 [ Oct 31, 2008 10:08 pm ]
Post subject: 

zenithconstructions zenithconstructions
So that's my essay. BUT, parting word: Go for a fixed price if you can - there are too many crap builders out there. If not, get an independent quantity surveyor to do an estimate for you, so that you can check it against your builder's.


Zenith,

I like the idea of getting a quantity surveyor to do a cost estimate. I did a bit of a search and they're not easy to track down. Do you know of any quantity surveyors in Sydney that you could suggest?

Cheers,
Casa

Author:  Garn [ Nov 01, 2008 6:16 pm ]
Post subject: 

Hi Zenith, I think that most reasonable people realise that some conditions cannot be forseen in a building project. These could be rock under the surface, highly reactive soils etc., though that is why a soil test is performed and a builder acting with due diligence should make their clients aware of this fact and if they know the area, have a good idea of potential problem areas.
What people really get upset about is when a builder says "oh the price of concrete and timber has gone up since we signed the contract, so your house will now cost you an extra $5000". If I have a contract for a house of agreed specifications to be built for an agreed price, then I expect the contract to be honoured, unless there is a change to the specifications of the project.
A builder cannot just come along and say "my costs have gone up so I am passing it on" and expect the client to wear it. How would the builder react if the client said "the stockmarket crash has reduced my income so I'm going to have to pay you less for the house"? An agreed price for an agreed product in an agreed timeframe, unless the specifications of the product change.

Garn.

Author:  Casa2 [ Nov 02, 2008 12:50 am ]
Post subject: 

Garn Garn
Hi Zenith, I think that most reasonable people realise that some conditions cannot be forseen in a building project. These could be rock under the surface, highly reactive soils etc., though that is why a soil test is performed and a builder acting with due diligence should make their clients aware of this fact and if they know the area, have a good idea of potential problem areas.
What people really get upset about is when a builder says "oh the price of concrete and timber has gone up since we signed the contract, so your house will now cost you an extra $5000". If I have a contract for a house of agreed specifications to be built for an agreed price, then I expect the contract to be honoured, unless there is a change to the specifications of the project.
A builder cannot just come along and say "my costs have gone up so I am passing it on" and expect the client to wear it. How would the builder react if the client said "the stockmarket crash has reduced my income so I'm going to have to pay you less for the house"? An agreed price for an agreed product in an agreed timeframe, unless the specifications of the product change.

Garn.


Also, I doubt a builder would pass on reductions in things like concrete and timber.

Author:  dymonite69 [ Nov 02, 2008 2:52 pm ]
Post subject:  Re: A terminology question (lol and a few other q's)

zenithconstructions zenithconstructions
Hi Elizabeth,

2. Under the HIA contract, and it is similar in most others, there is a specific protocol to follow in requesting a variation, whether the request is from the builder, or the owner. This should ALWAYS involve a request in writing, and approval is granted only after BOTH parties have signed it.


2. (b). If the builder requests a variation, that you do not feel you need to pay for, don't sign it.

Builder: "If you do not sign it, I'll be forced to terminate this contract as per 33.2 (d):


So what happens if the builder does not request for approval for variation. proceeds with the work then charges you for it 5 months down the track? Can you terminate the contract and refuse to pay the variation?

Author:  mexiwi [ Nov 04, 2008 5:08 pm ]
Post subject: 

Is this advice applicable to fixed price house/land packages as well?

I was assuming that if a builder owns the land they are building on then they would know the condition of the site/soil etc.

I wold have thought the price in that case wouldn't be able to be varied.

Author:  King willy [ Nov 05, 2008 11:08 pm ]
Post subject: 

Hi all
Im new to this forum but enjoy it very much. I intend to build with NBG and have asked many questions of sales staff and managment, more than the average FHB. I tried to pin down my site cost to get an idea for my total costs. I understand it depends on rocks slop soil etc. I have been frustrated and angry that no one can give me an idea of the final price. I thourght once you get to the contract stage after soil test if was all over, you now know what you are going to pay at the end. It seems Im wrong so whats the fixed price all about. It seems to be misleading.

I would like to build with a true fixed price builder and I mean provisional sums & prime sums all included in the total price. To make sure Ive got it correct, prime sums say for tiles to all wet areas. If tiles go up in price between now and final payment do I have to pay more?

Provishional sum does this only relate to site costs, rock removal, extra rio in slab?

Does any builder do fixed site costs?
What can I do to limit my exposure to cost blow out or just getting ripped off in my contract.
Where can I get a HIA contract are they all standard form contracts or specially written.

Thanks kindly for you valued info It truly is appreciated.

Regards
KW.........

Author:  carolc [ Nov 10, 2008 3:16 pm ]
Post subject:  Review Contract Stage

Hi All,

I'm in the stage of review the contract. I also want to sign a fixed price contract plus prime cost/provisional cost. And I would like to see any fixed price contract sample. Where we can get one? Also, can we get one standard HIA contract? Where can we get it?

Author:  dymonite69 [ Nov 10, 2008 6:18 pm ]
Post subject: 

King willy King willy
Hi all

I would like to build with a true fixed price builder and I mean provisional sums & prime sums all included in the total price. To make sure Ive got it correct, prime sums say for tiles to all wet areas. If tiles go up in price between now and final payment do I have to pay more?

Provishional sum does this only relate to site costs, rock removal, extra rio in slab?

Where can I get a HIA contract are they all standard form contracts or specially written.


Your interpretation is correct. Once the non PC/PS sums are excluded then the rest is fixed (but read the fine print for other unexpected costs e.g. extra council fees that aren't included in the building application).

One building inspector told me that the biggest contributor to PS increases are related to site works - "Once you are out of the ground, then you can breathe a sigh of relief"

The advise by building lawyers is to minimise as many PS/PC items but it may difficult to eliminate them all.


The provisional sum thing is there to protect the builder if for instance they do suddenly hit rock in the excavations or the engineer has to recommend different footings. Sometimes they can go ahead with a variation without your consent otherwise the building will not be code compliant or structurally sound. The honourable builder still will communicate this with you early on.

On the other hand, all PC variations or owner specified variations should be provided with a quote before work is commenced.

The alternative is that the builder will cost you for the worst case scenario and keep the money regardless of the eventuality.

The builder should show due diligence when calculating PS costs. There may be penalties for knowingly underquoting.

if you feel that the PS/PCs are unreasonable you can ask for the original contractors invoices before paying.

You can find HIA or MBA contracts on their websites.

Author:  mydreamhome [ Nov 12, 2008 4:23 pm ]
Post subject: 

Garn Garn
What people really get upset about is when a builder says "oh the price of concrete and timber has gone up since we signed the contract, so your house will now cost you an extra $5000". If I have a contract for a house of agreed specifications to be built for an agreed price, then I expect the contract to be honoured, unless there is a change to the specifications of the project.
A builder cannot just come along and say "my costs have gone up so I am passing it on" and expect the client to wear it. How would the builder react if the client said "the stockmarket crash has reduced my income so I'm going to have to pay you less for the house"? An agreed price for an agreed product in an agreed timeframe, unless the specifications of the product change.

Garn.


This is exactly what my builder is wanting to include in the contract.

They have indicated on their tender that if there is any increase in product or material during both the tender and the contract period, I will be charged according.
He has sighted clause 14, and clause 17 to enable this. I have read these clauses and I do not read this as being a suitable reasons. Yes, he could present me with a variation, but I would not need to agree to it, and I feel that I would be able to reasonably be able to refuse to sign it, without clause 17.7 applying, as this would be a different scenario to what Zenith illustraded, as it doesnt relate to work complying with law of some other statutory authority.
Do I read this correctly?
How should I handle things, as we are not yet to contract? Do I point out my intrepation (in which case I would assume he would have a special clause put in, that I would of course refuse), or do I let sleeping dogs lie and hope that it never arises, and if so just refuse. (i'm also concerned with this as this may cause other problems with progession of work).

Opinions please

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