How to Read a Building Contract: Key Clauses to Check

Signing a building contract is one of the biggest financial commitments most Australians will make — yet many homeowners sign without fully understanding what they're agreeing to. This guide walks you through the key clauses in a standard Australian residential building contract, explains what to look for, and highlights the traps that catch people out.

Types of Building Contracts

Fixed Price Contract

The most common type for residential builds. The builder agrees to complete the specified works for a set price, subject to certain conditions (usually "provisional sums" and "prime cost items" that can vary).

Advantages: Cost certainty. You know what you'll pay (assuming no variations). Good for budgeting.

Disadvantages: Builders price in a risk margin. If the build goes smoothly, the builder keeps the margin. The contract price is only truly "fixed" if the scope doesn't change.

Cost Plus Contract

The builder charges you the actual cost of labour, materials, and subcontractors, plus a management fee or percentage markup (typically 10–20%).

Advantages: You only pay for what's actually used. More flexibility for design changes during construction. Transparent pricing.

Disadvantages: No cost certainty. The final cost can significantly exceed initial estimates. Harder to get a construction loan (lenders prefer fixed price). Less incentive for the builder to control costs.

Recommendation: For most homeowners, a fixed price contract with clearly defined inclusions is the safer choice. Cost plus contracts are more suited to experienced owner builders or high-end custom projects where the scope is expected to evolve.

Key Clause 1: Contract Price and What's Included

The contract price should clearly state what's included and what's excluded. Watch for:

• Site costs: Are they included in the contract price, or listed as a separate allowance "subject to soil test"? If separate, you may face a significant additional charge.
• Provisional sums: These are estimates for items where the exact cost isn't known at contract signing (e.g., soil treatment, rock removal). The builder charges you the actual cost, which may be more or less than the provisional sum.
• Prime cost items (PC items): Allowances for fixtures and fittings you'll choose later (tapware, tiles, lighting). The allowance in the contract may be unrealistically low. Check each PC allowance against the actual cost of the products you want.
• Excluded items: Common exclusions include landscaping, fencing, driveway, letterbox, clothesline, window treatments, and air conditioning. These can easily add $30,000–$80,000.

Key Clause 2: Variations

A variation is any change to the works after the contract is signed. This is where many disputes arise.

What to check:

• Does the contract require written approval from you before any variation is carried out? It should.
• Is there a clear process for costing variations before they're done? You should receive a written quote for every variation before agreeing to it.
• Does the contract allow the builder to charge a variation margin (markup on variations)? Many contracts allow 15–25% margin on top of the actual cost of variations. Negotiate this down or cap it.
• What happens if a variation is done without your written approval? The contract should protect you from being charged for unapproved work.

Tip: Minimise variations by making all decisions (finishes, fixtures, layout changes) before signing the contract. Every variation during construction costs more than the same decision made at the design stage.

Key Clause 3: Payment Schedule (Progress Payments)

In Australia, building contracts typically use a progress payment schedule tied to construction milestones. Each state has legislation governing the maximum percentage that can be claimed at each stage.

NSW standard progress payment schedule (for contracts over $20,000):

Stage	Maximum Payment
Deposit	10% of contract price (or $20,000, whichever is less)
Base/slab	15%
Frame	20%
Lock-up	20%
Fit-out (fixing)	15%
Completion	5% (final payment after PCI)

Note: The remaining 15% is split between fit-out and completion to ensure the builder has incentive to finish the work properly. Some contracts combine stages differently — check the total adds up to 100%.

What to check:

• Does the payment schedule comply with your state's legislation? Ask your solicitor to verify.
• Is each payment clearly tied to the completion of a stage, not just the start? You should only pay for completed work.
• Is the final payment (5–10%) held until after a successful Practical Completion Inspection (PCI) and rectification of any defects?
• What happens if you dispute that a stage is complete? There should be a dispute resolution process.

Key Clause 4: Timeframe and Delays

The contract should specify:

• Commencement date: When construction will start (or the conditions that trigger commencement)
• Construction period: How many working days from commencement to completion
• Extensions of time: What events entitle the builder to extend the timeline (wet weather, material delays, client-requested variations, utility connection delays, industrial action)
• Liquidated damages: A daily or weekly amount the builder pays you if they fail to complete by the agreed date (excluding approved extensions). Typical amounts: $150–$500 per day. Not all contracts include this — but it should be in yours.

Trap: Some contracts have very broad "extension of time" clauses that effectively let the builder extend indefinitely with little consequence. Have your solicitor review this clause carefully.

Key Clause 5: Defect Liability Period

After handover, the builder is responsible for rectifying defects. The defect liability period is your contractual window to identify and report defects.

• Typical contractual defect period: 3–6 months from completion for non-structural defects
• Statutory warranty period: Varies by state but typically 6 years for structural defects and 2 years for non-structural defects (this applies regardless of what the contract says)
• Structural defects: Foundation cracking, roof frame failure, load-bearing wall issues — the builder must fix these for 6 years in most states
• Non-structural defects: Cracked tiles, paint defects, door alignment — must be reported within the contract period and/or 2-year statutory period

Tip: Conduct a thorough PCI (Practical Completion Inspection) before making the final payment. Consider hiring an independent building inspector ($400–$800) to identify defects you might miss. Document everything with photos and written reports.

Key Clause 6: Cooling Off Period

Most states provide a statutory cooling off period for residential building contracts:

• NSW: 5 business days from signing
• VIC: 5 business days
• QLD: 5 business days
• WA: Varies — check your contract and state legislation

During the cooling off period, you can withdraw from the contract without penalty (or with only a small administrative fee). After the cooling off period, withdrawing typically means losing your deposit and potentially facing damages claims.

Key Clause 7: Insurance

Your contract should address three types of insurance:

• Home warranty insurance (builder's warranty): Required by law in most states. The builder must take out this policy before construction begins. It covers you if the builder dies, disappears, or becomes insolvent during or after construction.
• Construction period insurance (contract works insurance): Covers damage to the building during construction (fire, storm, vandalism). Check who is responsible for arranging this — usually the builder, but verify.
• Public liability insurance: The builder should have a minimum of $10–$20 million public liability cover.

Before You Sign

1. Have the contract reviewed by a solicitor who specialises in building and construction law. Cost: $500–$1,500. This is non-negotiable — it's your biggest protection.
2. Check the builder's licence on your state's register (NSW Fair Trading, VBA in Victoria, QBCC in Queensland).
3. Verify home warranty insurance is in place before paying any deposit.
4. Review all PC items and provisional sums against actual product costs and realistic site cost estimates.
5. Ask for references from recent clients and inspect completed homes.

On AusBuildCircle.com, you can search for licensed builders and professionals in your area, read their profiles, and make informed comparisons before signing any contract.