Contract and finance process

Hi all,

I am in the stages of reviewing and signing a building contract. I just wanted to check if this process seems ok:

1. Obtain conditional finance approval from the bank (pre-approval)
2. Sign building contract and pay 5% deposit
3. Building plans submitted for council approval
4. Approved building plans submitted to bank for unconditional finance approval

Do builders usually ask for the contract to be signed and deposit paid before they will submit plans to council? What happens then if the plans don't get approved? And is it normal practice to sign a contract without having unconditional finance?

Thanks in advance for any advice/experiences

Hi an3035

It really depends on your builder and their processes and what state you are in as the laws vary.

In NSW you really shouldn't be paying any deposit until the builder gives you the HBCF insurance certificate, which from a builder's perspective sucks as it costs anywhere from $8-20,000 depending on the contract value.

However a lot of builders ask for a 5% or even a 10% deposit before lodging plans which I don't believe is legal. If any construction lawyers on here know better please advise.

As a custom builder we have our clients pay for the design fees and then we sign a contract once the plans are approved and we get the HBCF certificate.

Hope this helps a little. If it is a well known builder you are dealing with, you could post this question in the thread related to that builder.

good luck

Simeon

Thanks Simeon for your reply

Regarding the HBCF certificate, my contract has a checklist and one of the points is this:

• Do you understand that you are not required to pay the contractor a deposit or any progress payments until the contractor has given you a certificate of insurance under Part 6 or Part 6B of the Home Building Act 1989 (except where the work is of a kind that does not require insurance)?

I thought this might refer to the HBCF, however they have attached their public liability insurance certificate instead and told me this covers that point. Does this seem correct to you?

You are welcome.

No, public liability and HBCF ( Home building compensation fund formerly known as HOW -home owners warranty) insurance are two totally seperate things.

In summary, for your protection all builders should be providing 4 insurance certificates prior to you signing a contract:

1. HBCF - this is a NSW Government run scheme that protects you for any structural and waterproofing defects during the 6 year warranty period in the event that your builder dies or goes into administration. NEVER SIGN A CONTRACT IF YOUR BUILDER HASN"T GIVEN YOU THIS!!

2. Workers Compensation insurance - Also a NSW Government run insurance scheme which covers workers if they are injured on your building site whilst working and they have programs to help get injured people back to work.

3. Public Liability - covers the builder for accidents or liabilities whilst they are undertaking their business.

4. Contractors All risk Insurance - This covers any damage that might happen to the building structure whilst it is being being constructed, from fire, storms theft, accidents etc and covers rectification of the building works.

If you like PM me your email and I can send you the NSW fair trading checklist and homeowners guide.

I hope this explains everything, If not let me know

Cheers

Simeon

Thanks so much, I will be asking them for the HCBF certificate before signing!

I'm reading through this myself as a first time builder as I was told by a conveyancer that most people don't engage a solicitor to read standard building contracts...

Another thing I noticed is the builder has put down $20/week for liquidated damages. This seems extremely low to me. Would it be reasonable to ask for it to be as much as the rental income lost if we didn't complete on time? This would be more than $600/week. We are building a duplex and plan to rent one half out.

There is actually a significant amount of legal precedent regarding liquidated damages and the methods used to calculate them. But I wont bore you with the detail but from memory they have to be actual losses and not constitute a penalty.

Suffice to say that $20/week is a joke and at the other end you wont get close to $600/week.

You would probably be justified in asking for interest and holding charges but the builder may not agree.

What is the term of the building contract in weeks?

I see. They have written the term as 200 days not including weekends and public holidays, Christmas etc so it looks like 40 weeks?

Hi an3035,

You should not pay a deposit until you receive the Home Warranty Insurance. It is a breach of the Home Building Act for the Builder to require payment prior to this. It may be worthwhile to engage the Builder for the pre-construction works in the first instance. Sometimes, during the Council application stage, events arise that causes home owners to change their minds. For example, the Council requires work that causes the price to increase beyond the Owner’s budget. In which case, you would be bound by the construction contract price loss of profit of the builder as opposed to limiting your liability to the cost of the pre-construction work. Something worth considering. It may be worthwhile speaking with a construction lawyer for advice on your options to manage these risks


Cheers,
John