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Under any type of contract, a guarantor is a person (or persons) who guarantee payment to someone if the party to a contract fails to make payment.  A guarantor is not a party to the contract, however, they are legally liable to make payment as if they were a party.

When entering into a building contract, if Person A (the home owner) is the party to the contract with the builder, and Person B is going to be making some or all of the payments under that contract, then it is wise for the builder to request that, in addition to Person A signing the building contract, Person B signs a separate Deed of Guarantee.  This will allow the builder to legally chase Person B for payment if Person A fails to make payment under the contract.  Without a signed Deed by Person B, the builder cannot legally chase Person B for payment.

When you obtain a builder’s licence through the Office of Fair Trading, you are required to advise them of your business and /or residential address, and this is displayed on the public register.

If your office and / or residential address changes, the Home Building Act states that you must notify the Office of Fair Trading within seven (7) days of the change.

Our advice – plan ahead and notify the Office of Fair Trading as soon as you occupy the new address, as you don’t want licence renew forms or other important documents being sent to your old address, as well as the possibility of receiving a fine.

Under home building laws, a builder must ensure that all persons that he engages to perform ‘residential building work’ hold the appropriate licence as issued by Fair Trading (this does not apply where the person being engaged is actually an employee of the builder).

If the builder engages a contractor that does not hold the appropriate licence, then not only will the builder be liable to pay a fine of up to $110,000, but the builder will not be able to claim damages or enforce the contract against the client.  However, that client is still allowed to claim damages or enforce the contract against the builder.

Our advice – make sure every contractor on your site holds the appropriate licence!

We are sure many builders wonder what can happen if they don’t comply with the CPD requirements and obtain 12 CPD points each year.  The answer is – nothing.  Until you are audited, it is unlikely that anyone will ever know you have not complied, and you will simply continue to build and run your business.

However, if the Office of Fair Trading one day decides to audit you, and you have not complied with the CPD requirements, the Office of Fair Trading have the power to suspend or even cancel your builder’s licence.  This will obviously affect you ability to earn an income, and it may affect your ability to later reinstate your builder’s licence.

The system is similar to the driving licence system – you can physically drive a motor vehicle without holding a current driver’s licence, but if the police one day pull you over for a random check, the penalties are very severe.

This blog in no way encourages builders to fail to comply with CPD (given that nothing will happen), it merely attempts to educate builders on how the system works, and the very severe consequences of not complying.

Liquidated damages is the pre-determined amount of compensation you have to pay the client if you finish the project late (i.e if you do not finish the project within the contract period). 

Usually, liquidated damages are set at:
(a)          the amount of rent being paid by the owner to live away from the site; or
(b)          the amount of rent that the owner could get if the premises were leased.

TIPS:

1.   Never cross out the part of the contract that specifies the amount of liquidated damages

2.  Never write “$0” as liquidated damages

3.  Try and keep liquidated damages as low as possible – even “$1 per week” is fine

4.  If the owner insists on having a substantial amount of liquidated damages, then you can also negotiate the same   amount being paid to you as a bonus if you complete the project earlier than the date of practical completion

On practical completion, it is common for you to meet with the client on the site, and carry out an inspection.  This is usually the time where you hand the keys to the client, and you are paid your final progress payment.  Your contract will usually state the specific procedure for practical completion.  Here are some tips:

1. If your contract has a specific procedure for practical completion, make sure you follow it.  When the project is properly handed over to the client, all the risk gets handed over to the client as well.  If you do not follow the rules in your contract, this may mean that the client has possession of the site, but the risk remains with you.

2. If the client asks for the keys to the house before practical completion is reached, you should avoid giving the client the keys.  This is because although the client is using the property whenever they like, the risk still remains with you up until the date of practical completion.

Where certain residential building works are carried out, a final inspection is required, and a Certificate of Occupancy or Final Inspection Certificate is issued.

Make sure that your contract does NOT require you to obtain any type of Certificate of Occupancy or Final Inspection Certificate.  Even though the project may be finished, some clients may withhold your final progress payment until such a certificate is obtained, and you do not want payment of the final progress payment to be contingent on obtaining that certificate (which can sometimes be completely out of your hands).

A security account is an account set up in the names of both the builder and the client, and the funds that the client will be using to pay the progress payments are deposited into this account.

If the client does not want to set up a security account, make sure your contract gives you the right to request the client, at any time, to produce evidence that they have the financial capacity to make all payments under the contract.  This will allow you to satisfy yourself that the client has sufficient funds.

Although retention money is not common in residential building contracts (mostly because the law makes you give the client an automatic seven year warranty on the building works), here are some tips if the clients insists:

• Make sure that the retention percentage is not more than 5% of the contract price; and
• 50% of the retention amount should be payable to you upon practical completion, and the other 50% should be payable to you at the end of the defects liability period (which should be 13-26 weeks); and
• There is always the option of having in place ‘bank security’ rather than cash retention.

The Progress Stages as stated in the contract usually determine when you will be entitled to a Progress Payment.

Make sure your contract entitles you to progress payments after the “substantial” completion of each progress stage, as this will prevent the client from arguing that you are not entitled to a progress payment because you have not completely finished a progress stage.

When setting the percentages of the contract price that you will be paid at each progress stage, you should always take into account deposits that you have made for goods and / or materials that you have purchased, but will not be installed onsite for some time.

When setting the percentages of the contract price that you will be paid at each progress stage, always keep the final progress payment percentage as low as possible (usually 5-10%).