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

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