What is a Preliminary Agreement and why should I consider this for my next project?
A preliminary agreement is often used to obtain early documentation such as soil report and foundation data, or to develop design, plans and specifications for the construction or renovation of a home.
Sometimes the document is called a pre-construction contract, preparatory work agreement, quote, order, preliminary contract, estimate, provisional quote, authorised tender acceptance, or contract request.
No matter what it is called, the document is a contract. If the contract is to carry out domestic building work, and the price is more than $10,000, that contract must comply with the Domestic Building Contracts Act 1995 (DBCA).
What does a preliminary agreement include?
A Preliminary Agreement, is quite common amongst builders dealing with clients in the early stages of building a new home, whether they have obtained initial sketches or only in the early stages.
These agreements should not involve any part of the building work and are prior to entering into a building contract. Some common elements are:
- the consumer is committed to paying a “deposit”, related to the cost of a home described in the document.
- this “deposit” is usually not refundable if the building contract does not eventuate.
- A price for house construction is quoted.
What are the benefits of using a Preliminary Agreement?
Testing your builder
Prelim’s give yourself and the builder the opportunity to work together on your plan prior to devoting great sums of money with them. It is also a chance to ensure you and your builder are a good match (after all you will be spending some time together). For your build to be successful, you and your builder will need to be able to communicate effectively, even when issues will arise.
Let them do the hard work
Another great benefit to a PA, is you the client being able to let go of all the stuff that is involved with the initial stages, freeing up your time for dreaming and assisting in the creation of your dream plans. Good builders can effectively and seamlessly negotiate the waters for you.
Having used and dealt with a number of consultants you can rest assured you are getting great value for money and have your “team” working to ensure savings where possible.
Budget in mind
I believe by far the best positive with Preliminary Agreement is the fact the builder must ensure to, always keep your budget in mind. When designing and costing they will be looking to ensure the build does not go over your desired budget. There is no point in a builder designing something you cannot afford, simply put that’s a loose loose situation ??.
We understand this can be the biggest investment of your life. To help relieve some of the costs we ensure all consultants drawings / surveys are paid direct from yourself to ensure no additional mark-ups are added causing unnecessary costs.
It doesn’t lock you into the build
The most commonly asked question, is whether signing a preliminary agreement locks in that builder for the construction, the short answer is no. The preliminary agreement is completed prior to the quoting stage, allowing plenty of scope for the builder of your choice to begin the project.
If you have decided you can’t work with your builder during this time, it is all said and done once the obligations agreed to, are completed. Ensure you understand the costs associated to complete the preliminary agreement and consultants’ documents. If you choose to build with another party there is every chance you will loose your deposit to cover the builders costs.
Brownhill Homes will provided you with copies of all documents completed throughout the process should you decide to build elsewhere.
With every great idea there are some words of warning which you must know.
Not all PA’s are alike, for example some agreements provide for the builder to keep the plans at the end of the process, not the client. It is essential that prior to signing the PA, you discuss the ownership of the completed plans, and ensure that all is clear on the PA. We always ensure that a special condition is noted, that the plans belong to the client only.
With most things a preliminary agreement won’t work for everyone, however with a good understanding, they can be very beneficial to you, the client.
The HIA information sheet (NFSCON 1241, current at December 2018) recommends what not to do under Preliminary Agreement:
1. Ensure the scope of works does not cover any residential building work as defined under the Act;
2. Ensure the amount you claim under the agreement is relevant only to the preliminary works and not expressed as a percentage of the future residential contract or has an initial deposit or a credit for the later residential building contract;
3. Keep your Preliminary Agreement separate from your residential building contract; and
4. Do not execute the Preliminary Agreement at the same time as the residential building contract.
The contractual arrangements in these circumstances can vary according to the circumstances, however it is recommended that advice be obtained as to the arrangements in order to limit future risk.
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