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Payment terms for builders

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The building contract usually includes a payment schedule. The schedule sets out how much building work must be completed before the next installment or 'progress payment' is due.

The first payment under the contract is usually a deposit and should be limited to the builder's initial costs. Under the Home Building Contracts Act 1991, for building contracts valued between $7,500 and $500,000, the builder cannot ask for more than 5% of the contract price as a deposit.

Before signing the building contract, you should check that arrangements for the release of progress payments are acceptable to you and your lender. The builder usually submits an invoice before a progress payment is due. Your lender may make the progress payments directly to the builder on your behalf.

Most contracts specify a total amount for the building work. Two areas where the costs are estimated in the contract are the cost of goods that you will select during construction (known as prime costs) and the cost of work that cannot be known with certainty (known as provisional sums).

If the actual costs (including the builder's margin) are less than the estimated costs, the builder will pay you the difference. However, if the actual costs (including the builder's margin) are underestimated, you are required to pay the difference to the builder. Your builder must use reasonable care and skill when estimating costs in the contract.

The builder can include a term in the contract that allows for prices to be changed if the builder faces or incurs an increase in costs if government taxes or charges increase after the contract is signed or a State or Federal government law changes.

It is important that you fully understand your rights and responsibilities when entering into the contract to ensure that your finances will allow you to complete the project.

It is essential that you engage the services of an experienced Mortgage Broker and/or Builder Broker to ensure that the expected construction costs are well within your budget.


Major banks share under threat

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Australia's major banks are starting to see the effects of aggressive strategies from their competitors and it appears that they are beginning to have an impact.

In February this year the percentage of loans written by Australia's non-major banks was at 23.9% and all signs are that this will continue to move upward.

With the protection offered to the major banks as a result of the Deposit Garauntee during the GFC the major banks had a distinct advantage on its competitors. This resulted in a rush to the majors when times were difficult.

As funds have filtered into the market other lenders are now able to compete and in many cases offer significantly better deals than the majors.

As Mortgage Brokers are now making their clients aware of the great deals on offer by their they are seeing that they can make significant savings by switching lenders.

The removal of exit fees last year has made the option of switching much more appealing and has signaled to the majors that they have to lift their game or lose business.


How to avoid the pitfalls of building

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Unfortunately due to the complexity of the building process it is common for the builders quotation not to include all the items which are required to complete the home,

some items which are often not included in quotations are additional footings, stormwater, rainwater tanks, driveways & perimeter paths and landscaping.

This is why it is essential that before deciding on a builder that you first have some plans drawn up to be clear exactly what it is you would like them to quote you on.

Another advantage of drawing plans up independently is that you maintain copyright over the plans. Many people are not aware that if a builder draws the plans up for their clients then the builder owns these plans. This means they cannot shop around to other builders with these plans and ensure the best possible price.

It also means that if you choose to leave the builder due to cost blowouts or time delays it is very hard to do so as the builder will not let you take those plans to another builder. The builder knows that you are unlikely to switch builders as this will involve you having to change the plans to avoid copyright which means you have to re-lodge the plans to council and redo all the engineering work done to date. This can result in significant additional costs and time delays.

It is advisable that you attempt to fix the price of the contract with the builder prior to signing the contract. This will ensure that you do not get any significant cost blow outs during the course of the build. To fix the price of the build you may have to provide full working drawings and engineering plans to the builder so they can correctly calculate the appropriate footings required.

A Development Consultant can assist you with preparing this information and may also assist with your negotiations with the builder to ensure that the contract includes all items required to complete your new home.


Finding the right builder

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There are many ways that you can find a builder however the most common way is by asking family and friends for names of builders they have used and could recommend.

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Other methods include looking through the yellow pages and newspapers, surfing the internet or attending display homes.

For piece of mind it may be diligent to employ the services of an independent authority to assist with choosing a builder. Builder Brokers are independent advisors similar to Mortgage Brokers who have had many years experience and are qualified to offer advice on which builder is best suited to your needs.


Home indemnity insurance

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Unless your house is part of a multistorey development exceeding three storeys your builder is required by law to take out home indemnity insurance on your behalf.

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This insurance policy ensures that your house can be finished in the event that your builder dies, disappears or has gone out of business because he/she can't pay his/her debts (i.e. insolvent).

The insurance policy is required to be in place during construction and until six years from the date of 'practical completion,' that is, when the house can be reasonably used for its intended purpose.

Typically the cost of taking out home indemnity insurance should be included in the building contract. The builder chooses an insurer from a list of approved insurers and takes out the policy on behalf of the homeowner.

The minimum level of insurance cover required by law provides for a maximum payout for loss of building deposit of $13 000 and the maximum payout that can be made to rectify or complete a house under the insurance cover is currently $100 000 or the value of the contract work (whichever is less).

Your builder should provide you with a certificate of home indemnity insurance before starting any building work or taking any money from you under the building contract.

It is a good idea to keep the certificate of home indemnity insurance so that you can give this to the new owner, should you sell the house before the six-year expiry date.

If you need to make a claim under the home indemnity insurance policy you may be required to pay an excess, this amount may vary with each insurer.

You should consider taking out home and contents insurance when you take possession of your house in case of damage (unrelated to construction), fire, or theft.