Avoiding Pitfalls
Many clients ask what they should do to ensure a successful build. Our advisors understand the potential pitfalls and how to avoid them. But you can't go past the words of a 19th century poet and philosopher who wrote:
“It’s unwise to pay too much, but it unwise too little. When you pay too much, you lose a little money, that is all.
When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the job it was bought to do.
The common law of business balance prohibits paying a little and getting a lot. It cannot be done.
If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better in the first place”.
John Ruskin – 19th century poet and philosopher
We will cover a few pitfalls to avoid. If you do your homework before signing up to your section, or selecting a good builder, or even getting your finance sorted, then you are likely to have a pleasant experience.
Making right decisions from the start
In the rush to get started it is all too easy to overlook the obvious. You do so at your peril. After 20 years working almost exclusively with clients wanting to build, I have observed the clients most likely to have an enjoyable build make two key strategic decisions from the outset:
1. They choose and honest builder. Getting the right builder is critical to your success. If you make your selection because of price alone, then you do run the risk of being disappointed. Check references. Check the contract, plans and specifications carefully, ensuring your builder is being honest with you. We have a saying "your builder will always be honest with you...sometimes at contract, and sometimes at completion". What we mean is that if your builder priced the contract low to get your business, he/she will often find ways to increase it through variations and PC sums to get back his/her profit margin.
2. They choose the right finance. All too often finance is an afterthought. If you spend most of your time finding a section and a builder, and not the right finance, building can be disastrous. And don't think your bank has the answer as they will almost certainly use a old fashioned method of construction lending. This often means you become the ham in the sandwich, the person managing the conflict between your contract with the builder against your contract with the bank. The bank always wins, but your builder has control of the project, and this is often an awful situation to find yourself.
Running out of money
It’s easy to run out of money during construction. There are several reasons why this might happen, but they can all be overcome:
1. You may have to pay rent and construction loan at the same time. This is one of the biggest causes of stress and can be overcome using NewBuild “Turn Key” finance option.
2. Having too many items excluded from your contract. If you want to do some of the work yourself (driveways, retaining walls, landscape, and the list goes on) you must either hold back some of your deposit from the bank, or you need to find a way to include these costs in your finance. Refer “Acquisition Price”.
3. Your builder may have omitted items that you thought were included, or the PC sums were not accurate.
While it is impossible to know for sure if everything is covered, you can make sound steps to protect yourself, ensuring that the contract price does not move drastically, or that you have sufficient funding to ensure you can complete your home.
The Fixed Price Contract
Ensuring your builder offers a fixed price contract is an important tool to ensuring you stay within your budget. Avoid or minimise PC sums (Provisional Costs). PC Sums are where you and/or your builder agree to NOT fix a part of your contract. Typical PC sums may include earthworks, kitchen, floor coverings, driveways and landscaping. Where you agree to NOT fix an item, you should at the very least be sure the price agreed as an estimate is accurate, within reasonable expectations.
PC Sums can be a trap
This is one of those areas where a builder may reduce the perceived cost of the home, but you could end up paying more than you budgeted. We often joke that you are assured of having an honest builder…sometimes at the start of your project, and sometimes at the end. You are better to contract a builder you trust is giving you a fair and accurate price at the start – even if it appears higher than another builder – than to chance your price will increase due to blow-outs on your PC sums, or omissions to your contract, plans or specifications.
What to look for in a Building Contract
We have answered most of this already, but an important part of your contract, possibly the most important, are your plans and specifications. Your contract is simply a promise to deliver what is in your plans and specifications. So before you sign your contract, review your plans and your detailed list of specifications, because this is what you are paying for.
Clauses You Should Add to your Building Contract
In nearly all instances your construction loan conditions (especially the progress payments) will conflict with your building contract. Banks have certain rules around how much they will advance against a section, or how much money they allow as deposit, to how much they are willing to pay for a progress claim. And in some instances, they can even stop making payments if they are not satisfied.
At this point you have two legally binding agreements – with potential for serious conflict. To help avoid this conflict NewBuild encourages you to ensure three clauses are added to your build contract – even if you choose another bank.
1. The deposit and progress payments are to be made in accordance with the lenders guidelines
2. Practical Completion shall include the Code Compliance Certificate and the valuers Completion Certificate, in accordance with the lenders guidelines
3. The contract is conditional upon the lenders acceptance of the build contract, and a formal bank loan has been approved to build