Appropriate contract for small development

Discussion in 'Legal Issues' started by drfuzzy, 14th Jun, 2015.

  1. drfuzzy

    drfuzzy Member

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    I'm almost ready to put to tender 2 x higher end architect designed townhouses with expected build cost of circa $1.5m+ (total, both townhouses).

    The architect has offered to run the tendering process and administer the contract at a relatively low cost.

    The build will not be terribly easy in my view as there is a partial basement and boundary walls in a tight street in inner Melbourne.

    The architect has sent me a Simple Works Australian Building Industry Contract template and asked me if I am happy to use that contract. I understand it is different from a standard HIA contract.

    Schedule 1, item 24 of the ABIC contract relates to a penalty for delayed completion of works. I am thinking if this is set too high, the builders will inflate the contract price to mitigate the risk. If too low, I wear all the risk.

    My questions are:
    1) what are the pros/cons of ABIC simple works vs HIA contract;
    2) what reasonalble for schedule 1, item 24? I am thinking perhaps $1000/week per townhouse (ie. $2000/week). This would be a penalty of around 65%-75% of the expected rental return.
     
  2. Scott No Mates

    Scott No Mates ...and people wonder why?

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    The SBW contract is fairer/more suitable than the HIA contract as it has had input from both the RAIA and the MBA.

    I assume that you are trying to determine the amount of liquidated damages - determine it as roughly annual holding cost of the near completed project: interest on fully drawn loan, rates, water/sewer calculated as a weelky cost. Loss of rent would reduce the claim as it offsets the costs unless you are fully funding the build out of cash, then LD's would relate to loss of rent.
     
  3. drfuzzy

    drfuzzy Member

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    Thanks Scott,

    Funding approximately half cash, half borrowings. I estimate rent of around $1500/week per townhouse so that would be $3000/week - a yield of about 4%.

    Was planning to make LD slightly less than $3000/week - perhaps $2500-$2800 as I worry the higher the figure the higher the tender price as the risk needs to be priced in somehow - and I'm happy to take on some of the risk.

    Do you think this is reasonable, or should I go for higher LD? From a cashflow perspective, it will be an easy hold for me if I am to get $2500+/week in LD during any delay.
     
  4. Tigerboy

    Tigerboy Member

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    I would not use the HIV at all. It is not a well written contract and not appropriate if you are going to have an architect administer the build and contract. The Abic contract is specifically written for your situations.

    In relation to the liquidated damages, they must be a reasonable estimate of loss; which yours seems to be. However it will merely come done to negotiations with the builder.

    As a builder I would imagine for a complicated build less is better.

    Haas Kaplan
     
  5. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    HIV ??? Woah. I wouldn't want it either.
     
  6. Tigerboy

    Tigerboy Member

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    Hia is bad enough, HIV could ruin any development.
     
  7. Scott No Mates

    Scott No Mates ...and people wonder why?

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    Contaminated site?