First Home Build - Cost Plus Contract

kamac93 on 28/02/2022 - 18:50

Hi All,
In a bit of a pickle at the moment.

A family friend is a builder and we have signed a cost-plus contract with him for my mum's build, 15% commission is his cut. She is still eligible for a 45k combined state and federal grant if we have slab-down by 30th June. The cost will be $300-320k for a 3x2x2 single storey home. She has about $100k cash deposit.
It's been a long 12 months to get this stage where we are ready to proceed - have been waiting for final titles, building documents, quotes etc. She has already purchased the vacant land.

Now, the builder is not prepared to go ahead as the bank requires a schedule of payments for the build, of which he argues (and to an extent, I agree), is not a true cost-plus contract standard. The bank said they would only release funds at stages, e.g. bricks up ready for roof - where my builder would have to fund all the bricks, windows, frames and labour to put it all up, until the bank is happy to release funds to him which could be months down the line, where our original contract states he should be paid within 10 business days of paying an invoice.

We want to build with him, although it seems this is not possible due to the bank requiring strict rules before lending. I see it from the banks point of view, and the builders, as he could front up large sums without seeing him being paid for, for months. At this stage, the bank is just a middle-man? With him doing the 'heavy lifting' in terms of financing.

Are there any other options?

If she does not build now and obtain the grants (and lose 45k), she will have to wait a couple years for the construction prices to come down before considering building again, obviously it would be a fixed-price contract in the future, without any grants. just wondering what peoples thoughts are on what will happen to the prices of construction in 2-3 years when there is less demand?

Financial

Comments

  • Benoffie on 28/02/2022 - 19:01
    +1

    It's common for banks to cough up in stages. However, as you've stated, you're in a predicament time and finance wise. Banks can and do release funds for whole builds (done it myself before).
    Perhaps remind them of your situation - if they don't play ball, this either stops or you walk. Either way, they lose.

  • Drakesy on 28/02/2022 - 19:35
    +1

    Yep, unfortunately for the builder this is pretty standard (i'm surprised they're surprised tbh). you only pay once the work is done, the last thing the bank wants to do is pay upfront and the builder scuttles off.

    With the building market the way it is at the moment, liquidity is a big issue, just look at what happened to probuild. Unfortunately that's how it is, don't think of the 45k grant as a 'grant' as building at the moment will more than likely result in cost overruns and increases to material costs more than that (10-15% increases are common these days).

    I'd wait another 12 months personally and catch the building market as it comes back down.

    • stratbargain on 28/02/2022 - 19:42

      …..If it comes back down

      • Drakesy on 28/02/2022 - 19:42

        You pull subsidies from any area and watch the prices cool rapidly.

        Oh and supply lines will be much improved then.

    • kamac93 on 28/02/2022 - 19:42

      Thanks for your thoughts. Ideally we figured the 45k would soak up some of the pain at least. At the start we were quoted about 230k for the build… Now 320k… for a 150sqm home on 230sqm lot.

      Just stuck now with vacant land unfortunately.

      • Drakesy on 28/02/2022 - 19:43

        Yeesh
        That's unfortunate.
        Can't even put a caravan on it

        • kamac93 on 28/02/2022 - 19:45

          Even worse the middle lot was purchased and either side are now building… using our land to temporarily dump trash and whatnot.

  • Brainwhacker on 28/02/2022 - 19:48

    OP , you can determine the payments breakdown in the contract to something which works for both, paying upfront would be a huge risk as pointed out above. You also need to be prepared for massive overruns if you are to start building now,

    • bcarp on 28/02/2022 - 20:56
      +1

      Yes, I think a cost-plus contract right now is risky. The builder's cost will likely blow out due to circumstances out of his control, and all that will be passed on to you. On the other hand, a fixed price contract carries the risk that the builder will still have cost blow outs but be unable to recover them from you, forcing him to stop work & close shop.

      The bank is doing what is pretty much standard. Just purchasing the materials but not installing them on the property doesn't give the bank any equity to fall back on should building works stop. Imaging the situation of the builder purchasing $10,000 worth of materials, storing them in his warehouse, the bank paying, then the builder walking. Where's the bank going to recover the $10,000 from? However, if the materials were already installed, at least that's work completed.

      • bcarp on 28/02/2022 - 23:18

        I should also add that the bank may be open to funding based on a regular time frame rather than fixed stages. When we built, our builder wanted monthly payments. So he presented monthly invoices with what had been completed. The bank sent a quantity surveyor to check (& we did our own independent checking), then paid. It was more costly for us since we had to pay for a QS every month, but the builder & bank were both happy, & we were happy with the outcome in the end. We therefore didn't have to present fixed stages to the bank at the beginning, but more of a general plan. (We were on a fixed cost contract, so not sure how it would help your cost-plus contract either.)

        We're so glad we finished a few years ago. We pity those who are partway through a build right now.

  • Team Ozgiftcards on 28/02/2022 - 20:06
    +2

    Have the builder friend give your friend a fixed price contract to give to the bank..

  • brad1-8tsi on 28/02/2022 - 21:12
    +4

    We've just done $225k of work at my apartment block and apart from a small deposit prior to starting work everything was paid for after the stages of work were completed satisfactorily.

    If your builder doesn't have a line of credit or a cash float to fund major work then he's not really set up for major projects.

  • netjock on 28/02/2022 - 21:31

    the builder is not prepared to go ahead as the bank requires a schedule of payments for the build, of which he argues (and to an extent, I agree), is not a true cost-plus contract standard.

    Builder should just write a $400k contract with $100k stages and just come in under budget.

    You'd have to think twice when builders act like they don't know what is going on.

  • TheBilly on 28/02/2022 - 21:51
    +1

    Are there any other options?

    The banks will not finance cost plus arrangements. Unfortunately there is no other solution. The only solution is that you sign a cost plus contract with this builder and then a second lump sum contract to show the bank so they fund the project. HOWEVER I would not recommend this as your builder seems a bit clueless. Even the most amateur builder could’ve told you from day 1 that the banks weren’t going to fund this arrangement. So I would not think that he has the intelligence to make this ‘dodgy’ alternative arrangement workout without getting you all into trouble.

    Also the building costs are not going to come down after a few years.

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