Importance of building contracts in the Australian construction industry

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Construction works are a very serious undertaking that requires a great deal of time and effort, and, more importantly, puts a lot of money on the table. So, it’s really in your best interest to, when the time comes to roll up your sleeves, do everything in your power to protect your best interests and make sure everything goes according to plan.

Fortunately, Australian law recognizes one very neat asset in the form of a building contract that can make a lot of worries concerning all parties go away.

Let us take a look then at what makes construction contracts and how they can be used properly.

What are construction contracts?

But, before we proceed to more tangible considerations let us first clearly define what actually we are talking about here. Well, according to some general understanding a building contract can be defined as a legally binding agreement between a principal or the property owner and the builder that ensures fair and reasonable terms between the two parties.

This mutual understanding is ensured by clearly outlining the important project parameters like:

time-frame
cost of the project
scope of the works
required materials
expected quality standards
other project specifications

All these important considerations are defined in five essential construction contract elements without which the agreement holds no legal importance. These elements are as follows:

A valid offer
An acceptance on the behalf of a contractor
Considerations
The capacity of both parties to enter into mutual legal relations
Lawful purpose

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It’s important to remember that according to Australian law the existence of such contracts is not left to the discretion of involved parties, but rather legally required. So, the people who want to remove any possible uncertainties off the table usually use building contracts templates or look for some sort of third-party legal assistance.

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The benefits of construction contracts

Of course, everything we covered so far considers construction contracts through the lens of ensuring the barest possible legal compliance. This is a great mistake since the opportunity to outline various aspects of the owner-contractor agreement and make them formal can go a long way in making the building projects faster, more optimized, and more streamlined. Some of these more overlooked aspects come in the form of:

Allowing both parties to manage risk more effectively
Preventing time-consuming misunderstandings and bottlenecks
Setting out more precise details in terms of materials, deadlines, etc.
Helping to prevent eventual disputes, litigations, and similar legal cases
Serving as a quality control tool
Specifying how either of the parties can end the contract

Looking at the construction industry as a whole these properties are very welcome and can have great implications on the entire sector if used on a wider scale. This is very important to keep in mind since it is expected that the Australian construction sector will fully stabilize and return to pre-pandemic levels only by 2026.

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The different types of construction contracts

Also, we would like to point out that the overall effectiveness of construction contracts will largely depend on the owner’s ability to pick the type most suitable for the pending project. With that in mind, Australian legislation recognizes five main types of contracts:

Residential contracts: Residential contracts are, by law, required when building any sort of dwelling and outline minimal statutory rights for contractors, owners, and builders.
Commercial contracts: This type is meant for building commercial establishments and is, in its essence, very similar to residential contracts aside from a couple of additional zoning and construction law requirements.
Subcontract agreements: These agreements are made strictly between contractors and third-party subcontractors and define the specialized construction work that is going to be performed by the main contractor. The agreement must be made in accordance with the main contract.
Lump sum contracts: Lump sum contracts can be used both in the residential as well as commercial building sectors. The main difference from the previous types is that the works are performed for a ‘fixed price’ which inherently entails more risk for the contractor.
Cost plus contracts: Much like the lump sum contracts, this form exists in both main building sectors. This time, though, the client agrees to reimburse the contractor for various expenses such as labour and materials so it offers much more flexibility.

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In conclusion

We hope this short breakdown gives you a general idea of what the construction agreements are, just how important they are for the Australian construction sector and how they can be properly leveraged to ensure the best interest of both involved parties and, ultimately, make projects more optimized. All these things are very important to remember since construction projects are inherently risky. There is no need to make this situation