Building Contracts: Builders and Their Motivation

Friday 16th June, 2017

Often I’m asked why builders make certain decisions, where occasionally there are more cost-effective, or better quality measures. To these types of questions, I always explain that the decision made is based on the motivation of the builder within the particular contract – I’ll give some examples within this post.

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I had a geotechnical report done with an engineer to define a pier depth of up to about 2.5m given a particular soil type.  Some nearby houses in a similar location had pier depths of greater than 10m, and I’m often asked why the difference? The geotechnical engineer on my job, had assessed the risk was acceptable within their expertise and insurances.  Sure he could have reduced his risk further by going deeper, but that would unnecessarily cost me as the client more and therefore didn’t go down that path.

Now for a typical build or project home, there is generally a contractual clause that any additional depth of piers and reports can be charged to the client with a percentage mark-up for the builder, usually about 20-40%.  So within that contractual arrangement, the builder doesn’t want the most cost effective geotechnical engineer, they want the most expensive because it’s more money for them for less work. Meanwhile, the geotechnical engineer doesn’t want to take on any risks, because it’s in both their best interest and the builder who engaged them to have the deepest piers.  The builder wants the deepest piers because he gets more money from that work as well.  The only person missing out in the equation is the client, but they don’t have the expertise to challenge the cost.

Another example is plumbing fixtures and fittings, where people often complain they got the cheapest overseas fittings that don’t last and why the builder didn’t get better ones.

I ask:  “Well, what fitting was specified in your contract?

And they say: “There wasn’t anything specified.

In the above case, with the builder’s contract being fixed price, it’s in their best interest to find the absolute cheapest option as it meets their contractual arrangement while making the most profit and that’s their motivation.  In this case, it’s worth spending the time with the initial contract to define exactly what fixtures and fittings you want, otherwise it will always be the absolutely cheapest available.

So my advice would be to spend time setting up the builders contract. It is not typically done, but an open book cost plus contract with multiple quotes can work. However in that case, it is not in the builder’s best interest to save money and financing these kind of contracts can be difficult with banks.  The other option is to carefully specify everything in the contract, or (as commonly done) is to leave provisions sums for items that can be chosen and finalise them on site.  The perfect contract would be a cost plus arrangement with a built in incentive for the builder to be cost effective in getting quotes with all items specified.  This kind of contract would take a lot of time to produce, so is seldom done.  Instead the quickest option usually prevails at the expensive expenses of unsuspecting home owners.

Written by Michael Whitehouse (Facebook, Twitter, Linkedin)
Edited by Vivian Pham (Linkedin, Twitter)

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