Corporate & Commercial 03 December 2021

The importance of properly documenting a variation to a domestic building contract

It is crucial for homeowners and builders to understand their obligations and the contractual terms in a domestic building contract.

Seeking legal advice early to ensure you understand your obligations and that the contract you enter into is correct from the outset can save a homeowner and/or builder thousands down the track if a dispute were to arise.

A common area of dispute that arises in domestic building contracts is around variations.  Variations can cause problems if they are not documented correctly as they can increase the contract price and/ or extend the building period.

What is a variation to a domestic building contract?

A variation to a domestic building contract is a change to the building plans and/or specifications after the contract is signed.  When seeking a variation to a domestic building contract it is important to ensure the process set out in the contract is followed.  Quite often we see matters arise where the process has not been followed because the builder and/or homeowner have considered the variation to be minor or there is a friendship between the parties and a level of understanding that a formal variation is not required.  Even where a variation may be considered minor or there is a good relationship between the builder and homeowner, the variation should be documented to prevent disputes arising.

Why is it important for a homeowner and builder to follow the process in the contract?

It is crucial that this process is followed for reasons which benefit both a homeowner and builder.

A homeowner may request a change to building plans or specifications in which the builder may verbally agree to do.  Where a builder verbally agrees to complete a variation, a dispute may arise as to the details of the variation that was agreed and/or the cost of that variation.

A signed variation provides clarity to all parties of the effect the variation will have on a contract, including whether there is an increase to the price or time delay.  Further, if the variation would result in a decrease in the contract price, it is important the owner receives confirmation of this in writing.

The benefit for a builder correctly following the process in the contract is to ensure they get paid and to avoid time delay and costs in resolving a dispute.  If a builder has not followed the process for a variation in the contract, a builder is not entitled to recover any money in respect of a variation unless the matter is referred to VCAT.

VCAT may decide a builder is entitled to recover money for a variation (where the process is not followed) if VCAT is satisfied that:

(a) there are exceptional circumstances; or

(b) the builder would suffer a significant or exceptional hardship; and

(c) it would not be unfair to the homeowner for the builder to recover the money.

In referring the matter to VCAT, parties are likely to incur additional stress, time delay and costs which could have been avoided had the variation been documented correctly and the process followed.

When am I required to pay the builder for a variation?  Can the builder request payment upfront?

A builder cannot require upfront payment from a homeowner for a variation at the time it is requested.  The builder must include the variation in the progress claim relevant to the work.  Pursuant to section 40 of the Domestic Building Contracts Act 1995 (Vic) (DBC Act), a builder can only recover the percentage of the contract price as it relates to the stages of work.

Depending on the contract, there are two methods that can be used for a builder to claim progress payments.  The first and most common method, is for the builder to claim the progress payments as set out in section 40 of the DBC Act which includes a definition for base stage, frame stage, lock-up stage, fixing stage and completion.

Alternatively, a builder and homeowner can depart from the schedule in section 40 of the DBC Act provided they agree to different progress payments, however certain requirements must be met when departing from the schedule in section 40 of the DBC Act.

How can a homeowner request a variation to the domestic building contract?

The process for a homeowner to request a variation is set out in section 38 of the DBC Act.  As a party cannot contract out of the DBC Act and the requirements for requesting a variation, a builder executing a variation must follow the process in the DBC Act which is as follows:

1. An owner can request a variation to a domestic building contract by providing the builder with a written notice outlining the variation.

2. The builder must respond within a reasonable time of receiving such notice.

3. The builder may carry out the variation if the builder reasonably believes that the variation will not require a variation to any permit, will not cause any delay and will not add more than 2% to the contract price.

4.  If the builder believes the variation will require a variation to any permit, will cause a delay or will add more than 2% to the contract price then the builder must either:

(a) Give a notice to the homeowner which states:

(i) what effect the variation will have on the work;

(ii) whether a variation to any permit will be required;

(iii) if the variation will cause any delays and the builders reasonable estimate as to how long those delays will be; and

(iv) the cost of the variation and the effect it will have on the contract price; or

(b) Give a notice to the homeowner which states that the builder refuses, or is unable, to carry out the variation and the reason for that refusal or inability.

5. In the circumstances of item 4 above, the DBC Act confirms that the builder must not give effect to any variation requested by a homeowner unless a signed request for variation is given to the builder

Can a builder request a variation to the contract?

The process for a builder to request a variation is set out in section 37 of the DBC Act.  The builder must give the homeowner a notice that:

(a) describes the variation the builder wishes to make;

(b) the reasons why the builder wishes to make the variation;

(c) the effect the variation will have on the work,

(d) if a variation is required to any permit,

(e) if the variation will result in any delays and the builders reasonable estimate as to how long those delays will be, and

(f) the cost of the variation and the effect it will have on the contact price.

A builder must not carry out any variation unless the homeowner has signed consent to the variation, or the variation was as a result of the following:

1. a building surveyor or other authorised person under the Building Act 1993 (Vic) requires the variation in a notice or building order under that Act; and

2. the variation arose as a result of circumstances beyond the builders control; and

3. the builder included a copy of the building notice or building order in the notice for variation; and

4. the homeowner does not advise the builder in writing within 5 business days of receiving the notice that the homeowner wishes to dispute the building notice or building order.

When should I get legal advice?

Seeking legal advice early can save significant stress and costs, allowing you to understand the contract you are entering into and ensuring it is tailored to meet your needs.

Coulter Legal can assist at any stage of the domestic building contract process; whether you are still negotiating the contract, have concerns during the build, are requesting a variation or are in a dispute or potential dispute with the builder.  If you need any advice or guidance please do not hesitate to contact us.

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