Builder double credited item in HIA contract

hammerthis · Feb 10, 2022 10:41 am

Hey All,

We've progressed through contract stage, all signed and we're in preconstruction.

The site is cleared and they builder is doing their final checks.

They've found that in our contract they have double credited an item and it's coming to a cost of about $1000 that they are trying to push on us as a variation.

In the interest of moving things forward, I've suggested they give us discounted variations once we start build. 2 x $500 (should be $1000 each variation), but I'm curious, for this sort of mistake in a contract, does HIA clause 16.3 mean the mistake is on them, and they should pay?

Anyway keen to get peoples thoughts on this

H

BuildingandLegal · Feb 10, 2022 11:32 am

There is a clause in the contract that allows for an error or omission, "once found" to be advised and corrected, certain timeframes apply.
Once found; I have seen contracts that a mistake/error/omission was found a couple of weeks out from completion, and corrected.

The stage the error relates to is when the payment is due eg.
A window, would be due at enclose stage claim.
Carpet, would be due at final claim stage
earthworks, would be due at the slab claim stage

hope this helps

SaveH2O · Feb 10, 2022 12:58 pm

You give great advice mate, a real asset to the forum.

strannik · Feb 10, 2022 1:55 pm

what kind of mistakes does that usually cover? so something being credited/charged twice is an obvious one. but does that clause also opens up a possibility for the builder to pass price increases on to the customers?

for example could they say: "you know that item we quoted you a $1000 bucks for? we've found a 'mistake' and it's now $1500"?

hammerthis · Feb 10, 2022 1:59 pm

strannik

what kind of mistakes does that usually cover? so something being credited/charged twice is an obvious one. but does that clause also opens up a possibility for the builder to pass price increases on to the customers?

for example could they say: "you know that item we quoted you a $1000 bucks for? we've found a 'mistake' and it's now $1500"?

So for us, it relates to electric, they had previously overcharged.

The provided a credit for this is one area, and then in another area, they credited some of the same items again.

BuildingandLegal · Feb 10, 2022 6:19 pm

Firstly, SaveH20, thank you, appreciate it. I enjoy reading your advice. Plumber? or Hydraulic Engineer? You have very Solid knowledge!!!

Strannik
That's a can of worms!
If it’s an honest mistake, then anything! e.g. a brick upgrade is $5000 & the builder writes it as $50.00 or $500.00. You (builder) must be able to proof it was not intentional, it was not deceptive, it was not done to induce you to sign the contract and when noticed addressed in a quick manner, (Qld +5days). You (builder) should also be flexible on when its claimed and how its advised to the owner.

The issue currently in the market (#@!%^ = Covid) is, builders are seeing their profitability disappear, and the likelihood of mass bankruptcies is not if, but when, and the when is more like this first quarter of the year.

Look we all agree there are some real mongrel builders out there and they shouldn't have a license, there are also some mongrel clients out there that firmly believe they are entitled. But most builders and most clients just want to get on and build a house, if you believe building a home is going to be fun, you are delusional it is stressful for both sides, and builders at the best of times are crap at updating their clients!

Residential building contracts are a Fixed Price Contract with no escalation clauses, commercial are different in that they are cost +?% (normally 10%). No one foresaw the extent of price rises for trades and materials, nor the delays. For each day a job is not progressing it is costing the builder roughly $1500/day and causing dissatisfaction to the client. *Not justifying just stating a fact*

Prior to going to site "Pre-Site" any delays not caused by the builder, this is important, (a delay by the soil test = not the builder, by the certifier = not the builder, by obtaining approvals = not the builder, these are all outside the builders control) then these are eating into your allowed time to get to site. Every contract has a right to terminate if it goes over time, 99.9% of builders have a price review date and use this rather than terminating as all their work is wasted if terminated, they want to build your home because that’s how they make money.
If you go past the Price Review Date the builder can and generally will increase the price.

As long as you meet the allowed time in the contract, Ready for Site Date then the builder can't force you to price review. That said, they Can ask, they just Can't force!

Once it starts on site the only available extras are if the contract includes a PA (a Provisional Allowance) this is where the builder thinks he may need some extra money to do a specific task but doesn't know to what extent. e.g. PA $6k rock removal, but only cost $4k, or PA $10k Tree removal and it actually costs $12k,
Everything else is fixed unless the contract advised differently!

The contract allows for unavailability of materials, where an item is superseded, or no longer made/available the builder has the right to swap like for like, or like for upgrade, can't downgrade! If it is an upgrade he can offer the same, or the better at the increased price.

Now to address the covid effect.
Most builders are not coming at you with price reviews because they are trying for a money grab. Most builders are working on a cost plus margin (subject to builder) in the range of 18-28%. The lower the margin the less opportunity you have to make changes.

Most builders subject to their size and their display home presents need somewhere between 13-18% to cover cost.
Most builders currently are looking at going to site at 1-10%. So they are running at a loss before they start, this is before including delays due to material & trade shortages and the price rises in labour and material.

A small builder may have 25-50 builds. The average home 200m2 average spec, since June 2021 (SE-Qld) has seen increases of between $35-$45k $35k x 25homes = $875K or $45k x 50homes = $2.25mil. Rounding they are looking at losing $900 - $2.2mil before they start.

Medium builder 100 - 400 builds = before start, loss range $3.5mil - $18mil

As you can see the builder has a dilemma, go to site knowing they may or may not survive. *again I'm not justifying, I'm explaining what's happening in the industry & I'm not building homes so no conflict of interest*

Apart from simply asking for an increase to the contract price, the other option the builder does have, a fine line but arguable as my business partner advises. "Variation to contract"

At the time of the builder entering into the contract ABC Frames & Trusses were supplying for $21k (e.g.) they no longer supply to the builder and they must now use XYZ Frames & Trusses supplying for $35k. Variation of supply, $14k and this could be applied across most items. Tedious and time consuming but available to the builder.

The issue isn't that the builder priced it wrong it is that the market is running out of control.
In the past month steel frames increased again and carpenters (in demand) advised they would be increasing their rates by $8/m2 of house. These two increases mean a $6-$8k increase to a 200m2 average single storey design, that two months ago wasn’t on the radar.

Now you do have the right to fight it and enforce the terms of the contract. This could go one of few ways,
the job goes on hold and the fighting starts,
the builder proceeds and cuts corners,
or the builder goes the way of Privium, BA Murphy, Tasmanian Constructions (Hotondo).
I large number of clients believe, fine, we have Home Warranty Insurance, and yes it will help but watch the builds of the three named above. Unfortunately, the likelihood that any progress will be made on them within the next 6, 9 or even 12mths is extremely remote. There are a number of builds that are in the Hunter that have sat for the past 3 to 4 years since the builder went broke, that can’t proceed as the certificates of inspection for stages no longer exist and no one will sign off on the work and taking on the risk.

So “Strannik” you now have a very high level overview of the industry, the likelihood that your builder will come back to you with price rises is highly likely. You at that point you are both in a pretty crappy position. My advice, after swearing a lot, enter into open discussions with the builder on the price, you can ask for proof of before and after increases, you can ask for the increase to be excluding margin, you may be able to offset some inclusions to credit money back against the increase, you may be able to double the Builders Minor Defect period time, (1 @ 12mths and a 2nd @ 24mths). It cost nothing to discuss how to continue moving forward, the cost comes when you reach an agreement.

I am not defending builders nor the owners, I am engaged by both in my business. I am only describing the current conditions in the market, so that if the reader is impacted they have at least some understanding of how they got there and what options are on the table.

kennyc · Feb 10, 2022 6:41 pm

Thanks heaps for the explanation BuildingandLegal, so is this generally before you go to site that you can expect price increases? What about if you have already started? My site cut happened last week, nothing since. So as I've technically started can I still expect price increases during the build?

BuildingandLegal · Feb 10, 2022 6:49 pm

70-80% of builders are quietly repricing clients Pre Site, if its already gone to site and they didn't get a price review they are doing it on site. One way or another. If you price was Sept 2021 it is highly likely. Sorry

The Pre Site start are easier to get over the line, the On Site are questionable!

kennyc · Feb 10, 2022 6:54 pm

Thanks, they were going to charge me $5k price increase due to materials increase but waved it.
Hopefully no increases during the build. I'm pretty stretched as it is....
Time will tell.

strannik · Feb 10, 2022 9:38 pm

I understand the cost increases due to market changes (we already had that discussion with our builder). I was more curious about them trying to use that particular clause to sneak it in, rather than being upfront andbusing the other ways you've described.