In this continuing series of articles, I’ll take readers on a step-by-step journey through the property development process.
You’ve selected your site, conducted your feasibility studies, gathered a team of professional industry experts to help you navigate the sometimes rocky road of property development, made your way through the council’s bureaucratic maze of red tape and managed to obtain finance for your project.
There’s only one piece of the puzzle missing – the realisation of your development dream as a physical reality.
Turning the first sod of dirt and commencing construction of your project is perhaps the most exciting stage of property development.
All of your hard preliminary work is about to pay off as the plans your architect has drafted start to take shape as actual buildings or on your site; buildings that you will soon profit from by selling or tenanting them and enjoying the equity that will accumulate over time.
In this instalment of our series on property development, I will discuss the importance of selecting the right builder for your project and how to negotiate and understand the building contract.
So let’s get stuck into the nitty gritty of digging in the dirt and building your development dream.
Selecting the right builder
Sourcing the right builder to deliver your project can be a daunting prospect for the first-time developer.
There are so many options available, but which one is the best for you?
One way to narrow down the field is to seek a recommendation from friends, family or colleagues, or even your architect or development manager.
Note: The latter parties in particular may have the best advice because after all, they have worked with hundreds of builders in a similar capacity in the past.
You should make sure anyone you consider employing is a registered building practitioner.
This is important not just because it will reassure you that they are properly qualified, but they also require registration in order to ensure your project during the construction phase and until an occupancy permit is issued, as is their responsibility.
Tips: Request a copy of all the builder’s insurance certificates prior to allowing him to start the job.
This includes public liability insurance that notes you and your job as being covered for an amount of $10,000,000 as well as WorkCare insurance and completion guarantee insurance.
The latter insurance is required by the building surveyor prior to issuing a building permit and it is a statutory requirement that a builder provides completion insurance as well six-and-a-half-year structural guarantee insurance on all domestic building jobs.
Note: It is important to establish that the builder you are considering is able to deal with the type of project you are proposing.
The best way to determine this is to visit previous projects completed by them, which will give you an insight into the quality of their work.
It’s also advisable to speak with their previous clients to make sure they can deliver on their promises and are good to work with.
Additionally, it may be prudent to conduct a complete credit check of the builder’s commercial dealings so you know they have the financial capacity to complete your construction.
You can do this through a credit reporting firm such as Dunn and Bradstreet or Baycorp Advantage.
The last thing you need or want is a builder on the brink of bankruptcy pulling out of your project at the last minute due to their own financial issues.
Trust me – it can and does happen and has the potential to significantly delay developments and cause large budget blowouts.
Once you have decided on your builder you will need to give them a full set of working drawings, as prepared by your architect, along with a detailed set of specifications so that they can give you an accurate cost estimate to construct your project.
The plans and specifications must include all dimensions, materials, window schedules, services, joinery and surface finishes and should be highly detailed, outlining supposedly minor aspects of your project, such as how many telephone points, light switches or power outlets you want to be included.
Don’t be afraid to sit down with your builder and ask his advice on where he believes you could save money on your development from a construction perspective, or make the building process easier.
They can often provide ideas or insights into your plans that you and your architect had not considered.
While many builders will present you with a simple one-page fee outline, I recommend that you request and obtain a detailed proposal to ensure you know exactly what sort of bang you are getting for your buck.
The contract and specifications
Once you have found a builder you are happy with, it’s time to sign the all-important building contract.
There are two main domestic building contracts used in Australia; one is provided by the Housing Industry Association (HIA) and the other by the Master Builders’ Association (MBA).
Both are classified as plain English contracts which makes them easy for you to read, and they include obligations for both the owner and builder, as well as remedies for any possible breaches.
Within the building contract, detailed specifications are listed, outlining the extent of the work the builder agrees to undertake on your behalf, together with the project drawings and cost calculations.
The purpose of the specifications is to describe the agreement reached between yourself and the builder.
Let’s take a more in-depth look at what you can expect to find within your building contract and specifications.
The contract
The building contract describes the overall terms agreed to by you and the builder, including the price and payment arrangements.
It outlines the scope of the project, who is involved and what each party is expected to do to support the other (providing access to the site, providing accurate working drawings, etc).
Additionally, the contract must:
• Explain what will happen in the event of a dispute between the developer and builder;
• Incorporate a timeline that has been agreed to by both parties;
• State the works is to be done in compliance with specifications, drawings and calculations;
• State that the work must comply with the relevant building regulations.
The specifications
Contained within the contract itself, the specifications detail the work to be done and to what standard.
Drawings and calculations are specifications in a different forms.
Make sure you request adequate time to read the contract fully before signing and if you are unsure of anything, seek legal advice.
In general, the clauses in the contract protect the owner and it is usually unnecessary to amend any of the standard clauses, but for anything that is added by the builder that is specific to your development, it can pay to get a second opinion from a legal advisor.
The main items that should be included in the standard building contract include:
• Name and address of the land and the building owner
• Name and address of the builder
• A description of the land including title details
• A detailed description of the building project
• A contract price
The plans, building permit and engineering drawings should be attached and form part of the building contract, together with the detailed list of specifications.
One of the most important inclusions within the contract is the schedule of progress payments.
This is usually broken down into six instalments as follows:
1. An initial deposit to confirm acceptance of the contract and commence construction,
2. A payment at the end of the base stage,
3. A payment at the end of the frame stage,
4. A payment at the end of the lock-up stage,
5. A payment at the end of the fixing stage
6. Final balance on completion of the project.
Note: The percentage of the total construction contract that’s payable at each of these stages will be outlined in the building contract.
Commencement and completion dates are also important inclusions and outline how many working days the builder expects it will take to complete the construction.
This schedule will stipulate an allowance for inclement weather, weekends, public holidays and rostered days off.
Make sure you clearly understand the proposed length of the building project so there are no misunderstandings and you can ensure the builder keeps construction on track as agreed.
Within the contract will also be various allowances for prime cost items – that is fixtures and fittings not yet selected by the owner, such as tiles, appliances, and finishes for bench tops and provisional sums – and allowances for carrying out particular building works for which a firm price cannot yet be determined.
These may include excavations and footings, fencing, and landscaping.
Any additional conditions that are not standard are also included in the building contract.
If you want to learn more about the property development process you may be interested in How To Get Started in Property Development.
You may also be interested in reading our Team Series or check out our graphic guide to the Property Development Process.
