Avoiding Some Obvious Pitfalls

Many clients ask what they should do to ensure a successful build.  Our experienced 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's unwise to pay 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

 Making right decisions from the start

 1.  Choose an honest builder

Getting the right builder is critical to your success. If you make your selection because of price alone, then you run the risk of being disappointed.  Check references.  Check the contract, plans and specifications carefully, ensuring your builder is being honest with you.  Read our article under the builder tab for more details.

2.  Choose the right finance

All too often finance is an afterthought.  If you spend most of your time finding a section and a builder or house and land package and not the right finance, building can be disastrous.

Each bank has different types of construction loans, with different rules and terms; they are NOT all the same construction loan. Their lending criteria also differ quite dramatically, so just because your bank says no, does not mean you can't build with NewBuild.  And if they say yes, it does not mean they are providing a safe, managed path to a completed home.

Traditional construction loans leave you at risk of becoming the “ham in the sandwich” between your builder and your bank. You will sign legally binding agreements with both parties, but in most instances they will be in conflict with each other – and you will always lose. The bank always wins, but your builder has control of the project and this is an awful situation in which to find yourself.  It is very stressful when your builder walks off the job because your bank has promised to pay different amounts at different times in conflict with the builder’s contract.

NewBuild aligns the build contract and the bank’s terms before you start. Problem solved.

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 interest at the same time. This is one of the biggest causes of stress and can be overcome using the NewBuild “Client 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” for more details.
  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 take sound steps to protect yourself, ensuring that the build contract price does not move drastically and 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 (or PS) 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 risk your price will increase due to blow-outs on your PC sums, or omissions to your contract, plans or specifications.

Tip: PC Sum = BS Sum 

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 get a detailed list of specifications - ensuring they don't conflict
  • Review your contract, especially for omissions, PC sums or Owner’s Care items to ensure you are getting what you thought you were getting.  PC sums should be accurately quoted in advance and should not deviate more than 10% from those estimated
  • The most likely cost overrun in any build contract will be site works, foundation and retaining walls.  Make absolutely sure this is accurate and if possible fix these costs
  • Look for inequities such as penalty clauses against you but not against your builder for non-performance.
  • Consider if your contract has an exit clause if the builder simply stops performing.
  • Ensure you can meet the commitments of your build contract as compared to your loan.

Builders are more likely to negotiate with you in advance to secure the contract than they are once you have signed your contract, so take the time to get the contract that works for you. Don't be afraid to get seek appropriate legal advice.

Clauses you should always add to your building contract

In nearly all instances your bank’s 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. So while your bank may win the battle between any conflict between your build contract and the loan contract - the client almost always loses.

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 lender’s guidelines
2. Practical Completion shall include the Code Compliance Certificate and the valuer’s Completion Certificate, in accordance with the lender’s guidelines
3. The contract is conditional upon the lender’s acceptance of the build contract, and a formal bank loan has been approved to build