No… should I be?
We are seeing more and more residential builders struggling to recover their final progress payment. There are a number of factors that contribute to this problem, including:
- The owners have underestimated the true cost of the job once variations or provisional sums are taken into account, and they have literally run out of money.
- The owners and the builder disagree about the meaning of ‘practical completion’, with the owner expecting all minor defects rectified before the final amount is paid.
- The owners are worried that the builder will not return to fix future defects that emerge during the defects liability period, and want to keep the last progress payment as security.
Sometimes the fact that there will be a dispute becomes obvious during the course of the project. But sometimes there is no indication that the last progress claim will be a problem, until the due date comes and it is just not paid.
What can I do?
There are a number of pro-active steps that you can take to protect yourself. Not all will be necessary or suitable for your situation, but they are worth contemplating before you enter into your next contract.
- Make sure the owners have sufficient money from the outset. Most standard residential building contracts give you the right to ask for evidence of the owners’ capacity to pay for the work. This entitlement exists at the commencement of the contract (i.e. capacity to pay the contract price), and every time a variation is requested (i.e. capacity to pay the cost of that variation). By insisting on getting this evidence, you are not only protecting yourself but also assisting the owners to manage their budget for the work.
- Be vigilant with documentation for variations and extensions of time. Owners cannot budget for costs that they did not expect. If you follow the contract process for variations and extensions, you will be giving the owners as much warning as possible of increases in costs and ensuring that they can afford them. You may think that you have gotten away with not complying with the variation notice provisions because the owners have paid without complaint. However it is likely that payment was made from a limited pool of money, in which case problems will arise in the later stages.
- Practical completion. Never, ever, ever hand over the keys until you are paid! Most standard residential building contracts set out a process for achieving practical completion, and you should follow it, to the letter.
- Use a trust account or joint account. If the owners are funding the project (rather than a bank), it is possible to set up a joint account to hold the contract sum while the work is being undertaken so the money is secured in the event of a dispute. If you do not have security but a dispute arises about the last progress payment, consider negotiating with the owners to get them to agree to at least pay the last payment into a trust account to be released to you once all defects are fixed. Most legal firms (including us) would be happy to facilitate this arrangement for you.
- Offering a smaller retention could alleviate these concerns. Of course, there is a risk that it will never be paid, but the risk of losing $2,000 or $5,000 may, depending on how frequently it occurs, be better than the risk of losing an entire progress payment.
- Consider getting security. In cases where you have large exposure (for example, ordering expensive materials such as customised windows) consider asking for a bank guarantee or monies to be deposited into a trust account as security for payment. Where you want the right to hold security for in-scope works, it needs to be documented up front as part of the contract. However, where the large exposure arises as part of a variation, consider making your acceptance of the variation conditional on security being provided.
- Lodge a caveat. Most standard residential building contracts in the ACT (not NSW – it is not permitted!) give you the right to lodge a caveat to protect your unpaid invoices. Whilst a caveat does not entitle you to sell the land, it does mean the owners cannot sell without your consent, and, if the owners’ bank steps in to sell it, any money left over after the bank satisfies its debt must be given to you to satisfy your claim before any is paid to the owner. You can, however, be liable for damages if you lodge a caveat without reasonable cause so it is important to check your rights first. We can generally provide you with advice and assist you with the lodgement process for less than $1,000, including the caveat lodgement fee.
Some of these steps require adding special conditions to the standard terms of the contract. If you are interested in discussing how to implement any of these options, or would like assistance in understanding any of the existing rights and obligations under your contracts, the expert construction team at Meyer Vandenberg would be happy to assist.