By Brodie Gilbert
Building a house is a very exciting time. You get to design the house ‘you’ want and one that no one has ever lived in before. You get to choose colours, tiles, style, everything. This can be lots of fun however sometimes overwhelming. As brokers, we know there are a lot of little things that can get missed when people think about their new home and all the ‘good’ parts.
Fixed Price Build Contract (FPBC)
This is the final contract once all negotiations are done with a builder. This is not a quote and it what the valuer, broker and lender all work their figures on. Once this is set in most cases it cannot be changed. If the build was to change it would generally mean an entire re-assessment of finance and additional valuations. If towards the end of the build it looks like the budget is going to go over it may be best to fund these variations with cash rather than trying to redo the entire loan. This will only delay the process. Simply put, take time in the planning and negotiation stage and try to determine everything as best possible. This leaves less chance of changes. Ensure as many things are a fixed price as possible. Some things such as earthworks can sometimes be provisional as builders are unsure if there is hard digging etc. The differences in some instance from the preliminary figure to the actual cost can be into the tens of thousands. There are several aspects to a building contract that the majority of lenders will require before releasing funds. These comprise of:
- Building plans
- Council Approvals & Permits
- Specifications & Addenda
- Quotes for additional work
- Building Insurance (depending on lender)
The building plans are simply the drawings of the house to be built. These will be submitted to the council generally by the builder and will be required to be approved before building commences.
Council Approval & Permits
These will generally be done by the builder around the same time they submit the building plans. These comprise of the building permit and other build specific permits.
Specifications & Addenda
The specifications and addenda form part of the FPBC and are to be included before a valuer can perform their pre-build valuation. These outline the type and quality of finishings such as tiles, bathroom features and fixtures, window covering etc. This is where initial mistakes are made. People generally agree to lower quality materials to keep costs down and then during the build change their mind. This is where budgets are blown. Again, make sure time is taken at the initial stages to avoid variations throughout the build.
Quotes for Additional Work
There are some instances where the client opts for additional works externally to the builder. Such things include pools, decks etc. If these works make up the original valuation and the lender is funding the project then quotes for these works will be required before finance is approved.
Some lenders will require building insurance to be sorted prior to finance approval and others may require it prior to final payment. A broker will know which lender require what.
Progress payments are the series of payment the lender makes to the builder after each stage of the build is completed. Progress payments are used to aid with the builder’s cash flow however not leave the lender exposed by paying for works that are yet to be completed. The QBCC progress payment schedule is expressed as percentages of the total build contract amount and are:
- Deposit (5%)
- Base Stage (15%) – At this stage, first home owners grants will be paid to the builder.
- Frame Stage (20%)
- Enclosed (Lock-Up) Stage (25%)
- Fixing Stage (15%)
- Practical Completion Stage (15%) At this stage the valuer will revisit the property to ensure all contracted works have been completed.
Client’s deposit contributions sometimes are used to pay the deposit and part of the base stage. In other situations, the deposit contribution is simply pooled with lender funds and stages are all paid by the lender.
The majority of lenders will send the client a construction pack which will have prefilled or a template of a progress payment request. The builder will invoice the client to the exact amount in the original contract. The progress payment request form will then need to be completed and sent to the lender with the builder’s invoice signed by the builder and the client. The client can do this themselves or a broker can help with the process.
Builders Warranty Insurance
Something that sometimes catches people out when building, is the builder’s warranty insurance that is required to be paid BY THE CLIENT. Although builders have their own insurances and warranties for work, this insurance covers the client for things like if the builder or a contractor fails to complete work or work is defective. This is required in all states except Tasmania and is generally paid by the client.