Building and Construction Contracts: Benefits, Purpose, Validity, Definitions, and Types

This document explains the benefits of entering into a lump sum contract for the homeowner and the builder for a project to renovate and extend a residential dwelling. It also explains the purpose of a contract in the building and construction industry, contract validity, definitions and interpretations commonly applied to contracts, legal meanings of terms and clauses in building and construction contracts, and various contract types and the circumstances they cover.

Class Activity 1
1 Benefits of a lump sum contract
Explain the benefits of entering into a lump sum contract for the homeowner and the
builder for a project to renovate and extend a residential dwelling.
Lump-sum contract is beneficial for owner, as it limits the exposure and liability of owner for
renovation and construction. In this, builder agrees upon a sum, there is no liability of owner
for cost overruns. Such arrangements are easy to manage as owner makes payments
monthly based on percentage of work completed.
On the other hand, builder can achieve high profit margin as compared to cost-plus
contract. Such accounting is less intensive, which reduces overhead costs of builders and
lump sum arrangements facilitate steady cash flow.1
2 Purpose of a contract
Explain the purpose of a contract in the building and construction industry.
The purpose of a contract in building and construction industry is to allocate the duties
between parties, recognize and allocate the risk to the relevant parties, and reduce
uncertainty regarding the project and, permit the parties to plan for the project as well as
for the future.2
3 Contract validity
Give an explanation and example for each term below.
The terms are:
Misrepresentation and misleading conduct- Misrepresentation is an untrue
statement of fact made by one party to other in a contract. For example, false
statements by seller to buyer regarding quality of product.
Misleading or deceptive conduct under the Trade Practices Act- As per ACCC,
engaging in misleading or deceiving conduct in trade or business is illegal. For
1 Antony, D. (2019). The Advantages of a Lump Sum Construction Contract. Retrieved
from chron.com: https://smallbusiness.chron.com/advantages-lump-sum-
construction-contract-76851.html
2 Fortney, M. L. (2019). Construction contract basics. Retrieved from
fortneylawgroup.com: http://www.fortneylawgroup.com/faqs/Components-of-a-
Written-Negotiated-Construction-Contract.html

example, offering ‘unlimited’ internet download plans subject to
limitations.3
Mistake-In Australian Contract Law, been mistaken about any aspect of a contract
cannot provide a party with right to escape contractual obligations. For example,
failure to acknowledge terms of contract.
 Duress- Duress or coercion refers to a situation whereby an individual performs an
act because of threat, violence, or other pressure against a person. For example,
threat of killing.
 Undue influence - It occurs when there is inequality of power between contracting
parties. For example, gift from beneficiary.
 Unconscionable conduct - An unreasonable action that defies good conscience. For
example, taking advantage of disability of a person.
 Lack of formalities - The formalities are essential for valid contract and lack of
formalities result in invalid contract. For example, lack of agreement by both parties.
 Incapacity - A person who is not mentally sound cannot enter into contract as it
makes the contract voidable.
 Uncertainty - When a term is so uncertain that it cannot be considered as sensible,
the term is severed from the contract and if it becomes impossible, then whole
contract is declared void. For example, the duration of the contract.
Illegality - It is a conduct prohibited by statute and contrary to the public policy. For
example, illegal export of products.4
3 ACCC. (2019). Advertising and selling guide. Retrieved from accc.gov.au:
https://www.accc.gov.au/publications/advertising-selling/advertising-and-selling-
guide/avoid-misleading-or-deceptive-claims-or-conduct/misleading-or-deceptive-
conduct
4 ACL. (2019). Illegality and Public Policy. Retrieved from australiancontractlaw.com:
https://www.australiancontractlaw.com/law/avoidance-illegality.html

4 Definitions and interpretations commonly
applied to contracts:
4.1 Contract - When a consumer buys products or services from a
trader both enters into a contract. In Australia, the contract law
is governing by common law and statutes are considered under
the common law of contract. It acts as a legal explicit or implicit
agreement between two parties regarding certain transactions
or business.
4.2 Commencement date - It is the date of contract when
activities begin under contract and the contractor must begin
work on a project on the commencement date.
4.3 Completion - It is the date of completion of contract when the
contract is to accomplish as per the terms and conditions
mentioned under the contract.
4.4 Specification - These specific terms and conditions are
included in the contract with the agreement of both the parties
to the contract. It also refers to a specific type of standards
essential to followed in the contract.
4.5 Prime cost- It refers to the allowance allocated for supply of
essential products or items not selected finally under the
contractual terms.5
4.6 Provisional sums- It is the allowance allocated for the costs of
predictable essential work in the contract, which include supply
of materials about which, no details mentioned at the time of
commencement of contract.
4.7 Occupancy permit - The occupancy permits refers to the
documents that shows that a building examiner is satisfied with
the completed building work that the place is suitable for
occupation. As per the Building Act 1993, there is requirement
of the issuing an occupancy permit prior to occupation of a
building as an evident of occupancy by the occupant or owner.6
4.8 Defects liability period - The defects liability period refers to
a fixed period that starts from the date of real completion of
contract, in the course of which, the contractor possess an
express contractual right for the rectification of defects.
5 Castillo, J. (2019). Construction Contracts – Prime Cost:Provisional Sums. Retrieved
from scribd.com: https://www.scribd.com/document/348979115/Construction-
Contracts-Prime-Cost-Provisional-Sums
6 Victorian Building Authority. (2019). Occupancy permits. Retrieved from
vba.vic.gov.au: https://www.vba.vic.gov.au/consumers/permits/occupancy-permits

4.9 Possession- The contractor have a licence to
occupy the site for carrying out construction work, after
completion of which, possession is to be given to occupant or
owner of building.7
5 Legal meanings of terms and clauses in
building and construction contracts
5.1 Warranty Period under the act include the act and
section.
The Building Act 2004 consider consumer protection as a paramount consideration.
According to section 88(1) of the Building Act 2004, the statutory warranties are suggestible
in two circumstances i.e. for every contract for the sale of a residential building and every
contract to perform residential building work to which the builder is also a party.8
5.2 What are the responsibilities under section 240 & 248 of
the Building act 1993
As per Section 240 and 248(1) of the Building Act 1993, an agent of the possessor should
essentially have written authority from the possessor to act as their agent. In addition to it,
general rules of “Agency” are also applicable under the sections of this Act.
5.3 Find the Provisions for Cooling off as stipulated in the
Building act 1993 specify the section and clause.
Under section 221ZZZV of the Building Act, the Governor of Council might make regulations
regarding construction, installation, relocation or replacement of cooling tower or any other
part of cooling tower system. 9
6 Various contract types and the circumstances
they cover.
6.1 List 2 domestic building contracts
The domestic building contracts are of four types, which include standard, fixed-price, cost-
plus and custom contracts. The standard contract is governing by the rules established
7 Chappell, D. (2014). Possession of the site. In D. Chappell, The JCT Standard Building
Contract 2011: An explanation and guide for busy practitioners and students. John
Wiley & Sons.
8 Falcetta, M., & Tranzillo, T. (2018). ACT Builder Statutory Warranty Periods – Where
do they start and stop? Retrieved from trinitylaw.com.au:
https://trinitylaw.com.au/act-builder-statutory-warranty-periods-start-stop/
9 legislation.vic.gov.au. (2012). Building Act 1993. Retrieved from
legislation.vic.gov.au:
http://www.legislation.vic.gov.au/domino/web_notes/LDMS/LTObject_Store/
LTObjSt6.nsf/
d1a8d8a9bed958efca25761600042ef5/612cfae3bc399836ca257a2c001d8034/$FILE
/93-126a092bookmarked.pdf

under the Domestic Building Contracts Act 1995. Such a contract
contains standard terms but both the parties can negotiate as per the specifications in the
contract. Second is the fixed priced contract in which, pricing terms are fixed lump sum and
the price termed in contract could not be changed through variations to scope of work. Such
a contract includes prime costs as well.10
6.2 List 1 Commercial contract from the Australian
Standards
The example of commercial contracts are Business-to-Business contracts and transactions
between two parties. The contractual disputes between parties to commercial contract
include mislead of a party while entering into a contract, due to inappropriate disclosure of
information during the negotiations under contract. The consumer guarantees under ACL in
various cases applies to commercial relationships.11
10 Barry, J. (2019). KNOW WHAT YOU’RE GETTING IN TO: TYPES OF BUILDING
CONTRACTS. Retrieved from lclawyers.com.au: http://lclawyers.com.au/types-of-
building-contracts/
11 Law Business Research. (2018). Commercial Contracts. Retrieved from
gettingthedealthrough.com:
https://gettingthedealthrough.com/area/88/jurisdiction/5/commercial-contracts-
2018-australia/