Major domestic building contracts – progress claims
by Colleen May, General Manager – May Constructions.
This information is purely general in nature and is provided as a guide only.
From August 1, 2017 the Domestic Building Contracts Regulations 2017 was introduced and brought with it some changes to the way in which builders contract their work.
In Victoria, you must have a written ‘major domestic building contract’ for work worth more than $10,000, including:
- Erecting or constructing a home and associated landscaping, paving, retaining structures, driveways, fencing, lighting, heating, air conditioning, water supply or sewerage
- Renovations, alterations, extensions, repairs and any other improvements
- Work associated with renovation, alteration, extension or repair of a home. This includes landscaping, paving, retaining structures, driveways, fencing, garages, workshops, swimming pools or spas
- Preparation of plans or specifications by the builder (unless prepared by a registered architect, engineer or draftsperson)
- Demolition or removal of a home
- Any work associated with building on land zoned for residential purposes and for which a building permit is required.
Only registered builders can enter into a major domestic building contract and take out domestic building insurance, which is required for work over $16,000.
It is important to note that this insurance only protects you if the builder dies, becomes insolvent or disappears. You may also be able to make a claim with the Victorian Managed Insurance Authority if your builder fails to comply with a final order from VCAT or a court.
You are not required to have a domestic building contract for jobs that involve only one of the following:
- Tiling (wall and floor)
- Electrical work
- Plumbing, gas-fitting and draining
- Installing floor coverings
- Attaching external fixtures (awnings, security screens, insect screens and balustrades)
- Erecting a chain wire fence around a tennis court
- Erecting a mast, pole, antenna, aerial or similar structure
There are two methods for a builder to claim progress claims under a Major Domestic Building Contract in Victoria:
Most builders will use a standard contract prepared by industry organisations such as the Housing Industry Association. There are two methods for a builder to claim progress claims under a Major Domestic Building Contract in Victoria. Both methods are perfectly acceptable, however, there is significant confusion around their use. The standard method uses defined stages of construction and associated percentages which can be claimed once each stage has been reached. This method usually works reasonably well for a standard house constructed by a volume builder.
However, the current prescribed progress payments, definitions of stages and percentages required by Victorian legislation have remained virtually unchanged since the mid-1980s. The only changes since then have been minor changes to the definitions of stages in 1995. Clearly there have been significant changes to building products, technology and processes since then. It is difficult to understand why legislation from last century still regulates progress payments today.
There are many and varied good reasons why a builder would wish to use an alternative method of progress payments. For example, a bespoke build where the construction sequence does not match that of a “standard” house. Documenting an agreement to use an alternative method of progress payments under a Major Domestic Building Contract is known as Method 2 or Method B.
The new rules introduced on August 1, 2017 dictate a strict order in which an agreement to use Method 2 must be documented. This involves signing the agreement to use Method 2 for progress payments prior to signing the Contract itself. Unfortunately, this often creates suspicion and misunderstanding around what is a perfectly legitimate method. Form 1 is a statement of the Victorian Government’s view on when it is appropriate to use Method 2.
Many clients and builders believe that Method 2 may only be used when one of the circumstances listed in Form 1 applies. This is not the case and Method 2 can be used for any domestic building contract provided the client agrees to the use of Method 2 and signs Form 1 and now Form 2.
If a builder wants to use Method 2 for progress payments they should:
- Clearly define in Form 2 the alternative progress stages and the percentages for each stage.
- Explain to the client that Method 2 is the preferred method for claiming progress payments on their project and why.
- The owner signs the acknowledgement on Form 1 before they sign the contract.
- The builder and client then sign Form 2 to acknowledge the actual progress payments and percentages being used in the contract.
- The client should sign the acknowledgement that they have appointed a building surveyor.
- If the Excluded Items Schedule is used, the client should sign the acknowledgement that there are excluded items for which they are responsible.
- Finally, the client and the builder may then sign and initial the contract.
Make sure that all copies of the contract are signed following the order above. Do not just initial the pages containing Form 1 and Form 2; they require a full signature in the space provided. All pages of the contract documents, including plans, designs and specifications should be initialled.
Other sources of information:
Our Guest Contributor:
Thank you to Colleen May, General Manager of May Constructions for providing this overview of progress claims in domestic building contracts.
Colleen is a former President of the HIA and the HIA Charitable Foundation and continues to serve on the Executive of both organisations.
Please note that any information in this blog is purely general in nature and provided as a guide only. Professional legal advice should always be obtained if in doubt as to any contracts or agreements you are signing. Different States and Territories around Australia have different rules and laws as to progress payments.