Summary

Building contracts normally comprise three separate documents: 

• Contract quotation: this outlines the scope of work to be performed by the contractor 
• The building contract itself: this is a legal document, usually in standard form. It sets out the role, rights and responsibilities of the client and the contractor. 
• The addenda to the specification: this is a listing of the items to be supplied and installed by the contractor and the manner. These documents may be drawings or plans. These are prepared by either the contractor’s draftsperson or architect. Review them carefully to ensure they detail the work in accordance with the contract intentions. 

As a contractor, you may wish to use your own form of building contract. This is quite common in the project home industry. However, many contractors choose to use a standard form of contract, which is usually written in ‘Plain English’. These forms of contract can be purchased from such industry associations as Master Builders Association or the Housing Industry Association.

There are some important contractual provisions that must be followed, such as the contract must: 

• Be in writing and state a contract price 
• Provide a detailed description of the work 
• Include plans and specifications 

• State the names and addresses of the parties 
• State the registration number of the contractor 
• Provide a start date or how that date is to be determined and, if the start date is not known, require the contractor to do everything that is reasonably possible to ensure the work will start as soon as possible 
• State a date when the work will finish or a number of days (weeks or months) that will be required to finish the work once it is started 

Dos and don’ts

Just as there are some contractual provisions that must be followed, there are some practices that are essential to entering contracts, and there are some forms of conduct that are not acceptable. Here are some essential dos and don’ts: 

Do:

• Be honest at all times 
• Consider the capacity of the client to enter into a contract
• Be clear and open in your communications with all parties
• Speak up if you do not agree or understand any part of a contract
• Explain the contract to the client to ensure understanding of vital and important terms and clauses

Do not:

• Intimidate, force or threaten to induce agreement
• Offer or accept bribes or kick-backs to gain business
• Misrepresent yourself of your business (either by fraud, negligence or error)
• Make false promises (or over-promise)
• Make false claims or lie (including lying by omission)
• Violate statutes, regulations or laws

Legal elements of a contract

A contract has four legal elements that make it binding:

• Offer: made by one party
• Acceptance: accepted by the other party
• Intention: creates a legal relationship between the parties
• Consideration: the offer is considered by the other party

Residential and commercial contracts

In general, a building contract is a legally binding agreement between parties to do or not to do an action.

Subcontractor agreements

Subcontractor agreements are made between the main contractor and subcontractor, wherein a subcontractor’s services are called for specialist and specific work in the construction project on behalf of the main contractor.

Lump sum contracts

Lump sum contracts or fixed sum contracts are contracts wherein the contractor and the principal arrange a fixed price for the work that needs to be done. With this, the contractor will be hired before the project commences and will finish the project with the set price.

Cost plus contracts

A cost plus contract is a more flexible alternative to lump sum contracts. Under a cost plus contract, the hirer agrees to reimburse the contractor’s company for the building expenses such as the labour performed, the material purchased, and the other costs, plus additional payment that is usually stated as a percentage of the contract’s full price.

Breach of contract

When one party refuses to perform its obligation, the contract is terminated by breach. The innocent party has the opportunity to treat the contract as concluded and may sue for damages for the unperformed portion.

Termination of a contract

While a contract may end after successful execution, a contract may also be dissolved when frustrations and issues occur. The parties that can terminate the contract and the requirements that need to be fulfilled to terminate should be part of the terms of the agreement.

Abandonment

The act of abandoning one’s responsibilities under a contract.

Arbitration

Settlement of a dispute between parties to a contract by a neutral third party (the arbitrator) without resorting to court action. Arbitration is usually voluntary but sometimes is required by law. If both sides agree to be bound by the arbitrator's decision it becomes a binding arbitration.

Assignment

The transfer of a right, interest or title, or the instrument of transfer.

Bank Guarantee

A guarantee from a lending institution ensuring the liabilities of a debtor will be met, for example, a housing contract sum. In other words, if the debtor fails to settle a debt, the bank covers it. The funds are set aside, unable to be accessed by the owner or without the contractor’s consent, or by the contractor until their contractual obligations are met.

Bill of Quantities (BoQ)

A list of numbered or coded items describing quantities and materials required to carry out the contract work that is divided into sections corresponding with their usual building trade classification.

Breach of Contract

When one of the contracted parties fails in their obligations under the contract.

Case Law

The law as established by the outcome of former cases.

Clauses

Specific provisions or sections within a written contract. Each clause in a contract addresses a specific aspect related to the overall subject matter of the agreement.

Conciliation

A dispute resolution process whereby a mediator discusses the matter with both parties and attempts to bring them together in agreement.

Consideration

Something bargained for and received by a party of the contract, usually money.

Contingency Sum

A monetary sum allowed in the tender or contract for unforeseen expenses and is adjusted in the final account.

Contract

A voluntary agreement of an arrangement between two or more parties that is enforceable by law as a binding legal agreement. The agreement usually takes the form of a written document but can be verbal. Verbal contracts are more difficult to enforce by law.

Contractor

A registered individual, partnership or company that intends to trade as a builder. (Individuals must be a registered business.) This registration allows a business to provide services as a builder for work that requires a building permit, to a value of $20,000 or more and is located within the area of the Building Services Board’s jurisdiction.

Contract Sum

• Where the client accepted a lump sum, the lump sum.
• Where the client accepted rates, the sum determined by calculating the products of the rates and the corresponding quantities in the bills of quantities or schedule of rates.
• Where the client accepted a lump sum and rates, the aggregate (average) of the sums referred to in a) and b) above.

The contract sum includes provisional sums but excludes any additions or deductions which may be required to be made under the contract.

The adjusted contract sum is as above but adjusted to take into account any additions or deductions according to the contract.

Contract Under Seal

A formal contract signed by the parties and witnessed, as opposed to a simple contract that is just signed by the parties.

Cooling off period

Number of days during which a buyer can change his or her mind and cancel a purchase agreement or return a purchased item for full refund.

Cost-plus Contract

An agreement by a client to reimburse a construction company for building expenses stated in a ‘contract plus a dollar amount of profit’ usually stated as a percentage of the contract's full price.

Counter Offer

A rejection of the original offer with a new (separate) offer.

Defects liability period

A defects liability period is a set period of time after a construction project has been completed during which a contractor has the right to return to the site to remedy defects.

Determination

The ultimate right of each party to that contract. This right is normally only allowed when the other party defaults in respect of certain aspects of the contract and things need to be ‘brought to a head’. Often short of, but not excluding, termination of the contract.

Discharge

The circumstances in which the contract is brought to an end. Where a contract is discharged, each party is freed from their continuing obligations under the contract. A contract may be discharged by:

• Performance
• Repudiatory breach
• Anticipatory breach
• Agreement
• Frustration

Discharge by Performance

Both parties have fully performed their contractual obligations.

Discharge by Repudiatory Breach

Where there exists a breach of condition (as opposed to breach of warranty) this will enable the innocent party the right to repudiate the contract (bring the contract to an end) in addition to claiming damages. A contract cannot be discharged by a breach of warranty.

Discharge by Anticipatory Breach

Where a party indicates their intention not to perform their contractual obligations, the innocent party is not obliged to wait for the breach to actually occur before they bring their action for breach.

Discharge by Agreement

When both parties agree to bring the contract to an end and release each other from their contractual obligations. For a contract to be discharged through agreement there must be accord (agreement) and satisfaction (consideration).

Discharge by Frustration

A contract may be frustrated where there exists a change in circumstances, after the contract was made, which is not the fault of either of the parties, which renders the contract either impossible to perform or deprives the contract of its commercial purpose.

Where a contract is found to be frustrated, each party is discharged from future obligations under the contract and neither party may sue for breach. The allocation of loss is decided by the Law Reform (Frustrated Contracts) Act 1943.

Erasures

Items or terms removed from the contract. Erasures must be ratified (confirmed by expressed consent) by all parties to the contract.

Estoppel

• A rule of evidence whereby a person is precluded from denying the truth of a statement of facts he has previously asserted.
• The inability to deny stated details of the contract.

Extension of time (EOT)

This is a formal request, in writing, regarding a change in the date for completion of the project, brought about by some change in the project circumstances beyond the control of the contractor. This is permitted by the law for numerous valid reasons and depending on your contract’s time clause. Some examples of a valid reason can be:

• Delays in the delivery of important goods.
• The client has personally asked to start work at a later time.
• The client has requested variations in the scope of work.
• Unexpectedly bad weather conditions.

The contractor must be able to show sufficient evidence that the delay is caused by external factors and it is not due to underperformance.

Express Contract

An exchange of promises in which the terms by which the parties agree to be bound are declared either orally or in writing, or a combination of both, at the time it is made.

Whether oral or written, the contract must manifest a mutual intent to be bound expressed in a manner capable of being understood, and include a definite offer, unconditional acceptance and consideration.

Force Majeure

An unexpected and disruptive event that may operate to excuse a party from a contract, for example, a natural disaster.

General Conditions of Contract

The conditions constituting the contract as a whole covering all matters excepting so called ‘special conditions’ which may be needed to cater for any particular circumstances of an individual project.

Head Contract

The contract between the client and the contractor. Even though the works may be supervised by an architect, this is still the Head Contract.

Implied Contract (implied by conduct)

A legally enforceable agreement that arises from conduct, from assumed intentions, from some relationship among the immediate parties, or from the application of the legal principle of equity. For example, a contract is implied when a party knowingly accepts a benefit from another party in circumstances where the benefit cannot be considered a gift. Therefore, the party accepting the benefit is under a legal obligation to give fair value for the benefit received.

Implied Terms

Legally sustainable terms and conditions may exist in a contract as implied terms although they are not expressed in writing. Such terms, however, remain as obligations on the parties to the contract and arise out of common law, tort law and statute law.

Inclusions

Items or terms added to the contract. Inclusions must be ratified (confirmed by expressed consent) by all parties to the contract).

Latent Conditions

Physical conditions on site or affecting the site which differ materially from the physical conditions which should have reasonably been anticipated at the time of contracting.

Legal Capacity

1. A person's authority under law to engage in a particular undertaking or maintain a particular status.
2. A person’s capacity to make reasonable judgements.

Liquidated Damages

1. Pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the client is likely to incur if the contractor fails to meet the completion date.
2. Monetary compensation.

Mediation

A means of dispute resolution akin to that of conciliation.

Mediator

A person, preferably with meaningful expertise in the matter of the dispute and due procedure and natural justice, who convenes a mediation session.

Object of the agreement (object of the contract)

The thing which it is agreed on the part of the party receiving the consideration to do or not to do.

Offer

A definite promise to be bound, provided the terms of the offer are accepted.

Offers given under seal

The offer is bound by contract not to revoke the offer within the time specified.

Party (Parties)

The entity that takes part or is involved in an agreement (contract), lawsuit, or transaction.

Period Contract

Where a client enters a contract with a contractor for the provision of services or materials, or both, for an established period of time and for an established cost.

Possession of the site

Contracts generally grant the contractor exclusive possession of the site until practical completion when a handover meeting takes place and possession reverts to the client.

Practitioner

The person nominated as the supervisor of a registered building contractor and uses the title 'registered building practitioner'. A practitioner may not provide building services directly to another person.

Practical Completion

1. The point where all building work is complete or all but completed, in accordance with the contract, and the building is reasonably fit for occupation.
2. The stage where the work under the contract has been completed except for minor omissions and minor defects.

Usually, the builder gives notice to the client or representative to give notice that practical completion is approaching. Findings are recorded and a site inspection will take place to confirm completion.

Prior to the completion of the defects liability period, the builder will undertake a ‘final certificate inspection’ and list any unsatisfactory. All items listed must be rectified before a final certificate is issued. At the satisfactory completion of any required rectification work, the builder will issue the final certificate.^3 4  

Preliminaries

Those items required for building which cannot be easily included within any trade, for example, scaffolding, shedding, electricity, cost of supervision, craneage, testing of materials, quality assurance costs.

Principle

The term used in building contracts in lieu of the word ‘client’ or ‘owner’.

Privity of Contract

The privity of contract doctrine dictates that only persons who are parties to a contract are entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a third-party beneficiary) is not entitled to take any enforcement action if he or she is denied the promised benefit.

‘Pro Forma’ Contract

A rough copy or general use document that outlines the terms of an agreement without including specifics in some areas. The use of such a contract can allow a business or organisation to let a possible contract partner examine the basic terms of a contract while using a general form that can be altered as needed.

Progress Claim

Regular payments (usually fortnightly or monthly) from the client for materials delivered and work done on the site.

Progress payments are based upon measurements or estimations of work done. These measurements and the compilation of the monetary payments (calculations for payments), are usually made by the contractor and checked by the superintendent; to avoid later arguments. It is advisable that mutual agreement be reached at each step of the procedure. The superintendent then certifies the payment due, and passes the certificate to the client for settlement.

Prime Cost (PC) Items

The total of direct material costs, direct labour costs, and direct expenses.

Provisional Sum

An amount of money tentatively agreed upon between two parties contracting for work to be performed, in cases in which the full extent or nature of the work is not yet known. Determining a provisional sum allows work to proceed, with the expectation that the amount may be modified in the course of the work as more information about the scope of the work becomes available.

Quantum meruit claim

Court order or a provision in a contract that the client or customer should pay proportionately for a partially completed contract or order. This rule may not be applicable where it is essential that an order is completed or a contract is performed in full. Latin for, as much as deserved.

A quantum meruit claim arises if there is no specified sum to be paid for work done under an agreement between the parties. However, it can arise even where there is a contract if:

• There is an express agreement to pay a reasonable sum
• Work is done outside the contract, at the request of the owner
• The contract is later found to be void or unenforceable

Repudiation

Disowning or rejection of an agreement already accepted or agreed to. Repudiation amounts to a breach of contract where the refusal to perform is clear or patent, and where it goes to the heart of the contract.

Retention

Payment for a service or product that is withheld to provide security to the client for the full duration of the project’s construction and on to the completion of the defects liability period pending the satisfactory completion of the project.

Schedule of Rates

A list of unit rates prepared and submitted by the contractor to be used for the preparation of progress claims or for use by an architect or client to adjust contractor’s claims for variations.

Security/Retention

Both security and retention are money held back by the client for the purpose of ensuring the due and proper performance of the contract by the contractor.

Site Instruction

A formal instruction communicated from the head contractor to a subcontractor on the project.

Special Conditions of Contract

Often added to the general conditions of generic contracts, for example, special conditions are added when particular circumstances relating to a particular project requires inclusion in the contract.

Specification (Spec)

1. The written description of the works, or project, accompanying the drawings.
2. An exact statement of the particular needs to be satisfied, or essential characteristics that a customer requires (in a good, material, method, process, service, system, or work) and which a vendor must deliver.

Specifications are written usually in a manner that enables both parties (and/or an independent certifier) to measure the degree of conformance.

Sub-Contract

A practical abbreviation of the words ‘subordinate contract’. A contract let to a subcontractor for work within the scope of another contract.

Subcontractor

A person who works under a subcontract.

Subletting

The letting of a contract of tenancy, for example, to another party by the party to the original letting. There can, of course, be further subletting, in theory, but some subletting is prevented by law and other subletting is regulated or prohibited altogether by specific contract conditions.

Superintendent

A representative of, and paid by, the client. They are often architects but can be other suitably qualified personnel such as a clerk of works or building consultant.

Suspension

Under certain contracts the superintendent may direct that the works be suspended at any time and may allow the contractor to suspend the works. In those cases, the superintendent is to direct recommencement as soon as possible and to rule on costs, which are normally borne by the contractor except where the suspension is the fault of the client or his agents. In other contracts the contractor is permitted to suspend the works in the event of failure by the client to make payments in accordance with the contract.

Tender

A sealed bid or offer document submitted in response to a request for tenders and containing detailed information on requirements and terms associated with a potential contract.:

Termination for Convenience

Standard clause in government contracts which gives the government the right to unilaterally terminate the contract at any time with or without giving any reason. The contractor is generally entitled to a negotiated settlement for an equitable recovery of costs and losses incurred.

Tort

1. A civil injury, actionable by a private individual, as opposed to a criminal wrong, actionable by the State.
2. The branch of law concerned with civil injuries and their remedies.

Unequivocal

1. Unambiguous; clear; having only one possible meaning or interpretation.
2. Absolute; unqualified; not subject to conditions or exceptions.

Variation

Changes made in writing to items or terms of the contract due to unforeseen circumstances. Variation orders are made through putting concerns into writing. This can be done by sending formally a letter containing the changes proposed. Important details that should be included are work description, its technical specifications, and any additional costs if any. Variations must be ratified (confirmed by expressed consent) by all parties to the contract.⁵

• You can register on HIA's website and purchase different types of contracts and other useful resources.
• To learn more about AS 2124, you can check the sample copy published by SAI Global: AS 2124
• To learn more about AS 4000, you can read a sample copy of the Administration Manual found on the SAI Global’s website: AS 4000
• To learn more about contracts in NSW, visit NSW Fair Trading’s website: Contracts | NSW Fair Trading
• To learn more about home building contracts, visit NSW Fair Trading’s website: Home building contracts | NSW Fair Trading

Sample contracts:

• HIA NSW Residential building contract for new dwellings is available here.
• HIA NSW Residential building contract for renovations and additions is available here.
• NSW Fair Trading Home building contract (5K to 20K) is available here.
• NSW Home building contract for more than $20,000 available here.
• QLD QBCC Commerical subcontract is available here.