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As a landowner renovating your home, it is likely your builder provided you with a copy of the Master Builders HIC6 Home Improvement Contract (HIC6 Contract) and asked you to sign it. This article will discuss the HIC6 Contract, including how to:
- review the HIC6 Contract; and
- identify the key areas of risk for you as the owner.
What Is the HIC6 Contract For?
The HIC6 Contract is a standard form contract prepared by the Master Builders Association. Given that the HIC6 Contract has been prepared by an association of builders, it is somewhat more favourable to the builder than you, the owner.
The HIC6 Contract is intended for use on home improvement or renovation projects over $10,000. This means that if you are building a new home from scratch this form of contract is probably not appropriate.
The ‘Triangle’ of Time, Cost and Quality
The metrics for measuring success on a construction project are time, cost and quality. They are applicable to all:
- owner-occupiers looking to embark on creating their dream home project; and
- large multinational companies undertaking a large scale construction project.
In the ideal situation, you achieve your goals of completing the construction on time, at your budgeted cost and up to the standard of quality you desire in equilibrium.
The reality, however, is that you may need to sacrifice one of these metrics to an extent.
Alternatively, if you are renovating your existing home which has a heritage-listed facade, quality might be essential to you. You may be willing to accept a longer period for the builder to complete the works.
Before you undertake the build, it is worthwhile spending some time to think about what:
- success will look like for you;
- aspects you need; and
- you are willing to live without.
Doing this will then inform which parts of the HIC6 Contract are of most risk to you.
An extension of time is where the builder can extend the period for completion of the works as set out in the Appendix to the HIC6 Contract. These entitlements under the HIC6 Contract are extensive and include:
- unavailability of materials;
- inclement weather (i.e., rainy days);
- industrial action (i.e., strikes);
- delays by authorities in granting permits; and
- a broad ‘catch all’, being any act beyond the builder’s control.
It is important to realise that this means the period for completion of the works is not concrete and can be extended (sometimes significantly) should those events arise. It is fair and reasonable for the builder to have some rights to extensions of time as there are external factors that cannot be controlled. However, under the HIC6 Contract, these rights are quite generous to the builder.
Liquidated damages are damages that are payable to you where the builder fails to complete the works within the expected period. They are usually based on a set daily or weekly rate and are included in Item 17 of the Appendix to the HIC6 Contract. This can be an incentive for the builder to carry out the works in a timely manner. However, given the extensive extension of time rights that the builder has under the standard form HIC6 Contract, your entitlement to receive compensation can often be delayed or negated.
Accordingly, it is important for you to consider which causes of delay are fair and reasonable for your project. You should also ensure that the rate of liquidated damages in the contract represents a genuine estimate of your likely losses as a result of the builder failing to complete the work on time.
One of the biggest risks for most owners under the HIC6 Contract is the considerable amount of potential cost escalations. The warning in Item 10 of the Appendix to the contract lists this. However, under the law, all domestic building contracts over $10,000 need to include a cost escalation warning at each clause where it may be applicable. This will allow you to recognise where costs may increase during your project. Potential cost escalations can include:
- variations, where the scope of work changes;
- interest on overdue payments;
- extra amounts for excavation and footings;
- liquidated damages you may need to pay. Here, if your actions cause the project to delay, you may need to pay the builder compensation if it causes them a detriment.
Cost escalation clauses are problematic as it reduces your cost certainty. It is important for you to consider each of these cost escalation clauses and ensure they are:
- fair and reasonable in the context of your project; and
- not costs that the builder created due to their wrongdoing.
Where you are responsible for the design of your renovations, you must provide a warranty that these plans and specifications are:
- good; and
- suitable for your projects.
The builder can also rely on these plans and specifications. This means that if there is an issue with the design of your renovations, the builder may be able to avoid legal responsibility and you may have to wear the relevant cost.
Therefore, if you are responsible for the plans and specifications, you should ensure that you have a consultancy services agreement with your architect or engineers that appropriately protects you. These agreements should contain an obligation on the consultant that the plans and specifications are:
- prepared with due care, skill and diligence;
- compliant with all laws; and
- fit for their intended use.
Unfortunately, defects are almost inevitable in any construction project. That is why, under construction contracts, the builder will almost always need to rectify defects after completing the works. They must do this during a period known as the defects liability period. When the builder believes they have finished the work, you must ensure you attend the final inspection to identify and notify defects to the builder within the time period required by the contract. Otherwise, the works will be deemed to be complete and your defects may not be rectified.
As a homeowner, you have the benefit of the legal warranties that will protect you from any wrongdoings of a builder. These apply regardless of what the builder may insert into the contract. However, under the HIC6 Contract, the builder may not be liable for a breach of any of these warranties if the relevant breach:
- was known by you; or
- where you reasonably ought to have known of the breach.
You are legally entitled to the full benefit of the legal warranties, which operate in your favour and are there to protect you.Continue reading this article below the form
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Liability & Indemnities
An indemnity is where one party to a contract must compensate the other against harm or loss they suffered. Under the HIC6 Contract, you must indemnify the builder against breaches of copyright in relation to designs and plans. Ideally, you would want to seek a mutual indemnity from who you have obtained these documents from, either your architect or engineer. You may do this to ensure they have not breached any copyright in preparing the documents.
If there is any evidence on the boundaries or position of the land that is not accurate, you must provide a further indemnity of this evidence.
There is also a deed of guarantee and indemnity attached to the HIC6 Contract. This is only applicable where you are entering into the contract as a company. If you are not, you should not execute the deed.
Termination provisions are always important to look at. In these provisions, there are references in the HIC6 Contract to fundamental breaches. Fundamental breaches of a contract generally entitle the other party to end the contract.
As a homeowner, it is important to know your rights and your risks and, if necessary, how to seek amendments to the key risks the HIC6 Contract poses to you. If you are a homeowner, looking to engage a builder for a project, you should:
- make sure the Appendix to the HIC6 Contract properly reflects the commercial realities of your project;
- beware of any special conditions inserted by the builder in Section B;
- be diligent during the project;
- closely monitor the works and any claims issued to you by the builder; and
- deal with issues with the builder as soon as they arise.
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