Before you sign a building contract in NSW: the checks that protect you

Signing a building contract is usually the largest financial commitment a homeowner makes after buying the property itself. In New South Wales, the Home Building Act 1989 sets out rules that apply to residential building work whether you are building new, extending or renovating. Most of them exist to protect you, but they only help if you know they are there. This article covers what the law requires before and at signing, why those rules exist, and what we do on our side of the table.

When a contract has to be in writing

The thresholds are set by the dollar value of the job, including GST. According to NSW Government guidance on contracts for residential building work:

• Over $5,000: a written contract is required. Jobs between $5,000 and $20,000 are "small jobs" and need a written small jobs contract (section 7AAA).
• Over $20,000: a "large job" contract is required, with more detailed content, including a progress payment schedule and a cooling-off statement (section 7).

Either way, the contract must be dated and signed by or on behalf of each party. If the price is not fixed, the threshold is based on the reasonable market cost of the labour and materials involved, so a job cannot be kept out of the rules by leaving the price vague.

The NSW Government publishes standard home building contracts for small and large jobs. Builders can use their own contracts, but those must still include the terms the Act requires. A contract is taken to include the terms set out in Schedule 2 of the Act, and a term that conflicts with them is unenforceable to that extent.

The Consumer Building Guide

Before entering a contract for residential building work over $5,000, a licensed contractor must give you the Consumer Building Guide (section 7AA). It explains how the Act works, your rights, and how disputes are resolved. It is short and worth reading before you sign, not after something goes wrong.

Deposits: 10 percent, maximum

Section 8 caps the deposit for residential building work at 10 percent of the contract price. A deposit is any payment on account before work starts.

The reason is simple. A deposit is money paid for work that has not been done. If a builder fails before starting, a large deposit is the money most at risk. Keeping it small limits what you can lose.

Insurance must be in place before any payment

For work over $20,000, the builder must take out cover under the Home Building Compensation Fund (HBCF), run by icare. Under section 92, a builder must not do the work unless that insurance is in force in the name they contracted under, and must not demand or receive any payment, including a deposit, until you have been given a certificate of insurance.

HBCF is a last-resort cover. It responds if the builder becomes insolvent, dies, disappears, or has their licence suspended for failing to comply with a money order made in your favour. Within those limits, it can cover incomplete work and defective work, including major defects for up to six years and other defects for up to two years from completion.

Before paying anything, check the certificate against the contract and the licence:

• the builder's name matches all three documents;
• the property address is correct; and
• the work described matches what you agreed to.

You can confirm cover exists on the HBCF certificates register.

Check the licence, and the name on it

Anyone who contracts or advertises to do residential building work in NSW needs a contractor licence in the right category. A qualified supervisor certificate allows someone to do and supervise work, but not to contract for it. For companies, a nominated qualified supervisor must hold the matching licence or certificate.

Use the NSW licence check before you sign, and confirm:

• the licence is current, not expired, suspended or cancelled;
• it covers the type of work in your contract;
• the name on the licence matches the name on the contract and the insurance certificate; and
• there are no disciplinary records you should ask about.

The cooling-off period

For contracts over $20,000, you can rescind within five clear business days of receiving a copy of the signed contract, without giving a reason (section 7BA). The contract must include a statement explaining this. Use the time to read it properly, check the licence and insurance, and ask questions.

Progress payments and variations

• Progress payments must match the work done. Large job contracts must include a progress payment schedule, and each payment should follow a completed stage. Paying ahead of the work puts you back in the same position as a large deposit.
• Variations must be in writing. Any change to the work or price must be written, signed by both parties and attached to the contract. A verbal "we'll sort it out at the end" is how disputes start. See our post on fixed-price and cost-plus contracts for how variations affect what you end up paying.

Why the rules exist

Each of these requirements answers a specific risk. Building work is paid for over months, often before it can be judged, and much of it is concealed as it goes. A written contract fixes what was agreed. The deposit cap limits exposure before work starts. Insurance before payment means the homeowner is protected if the builder fails. Licensing means someone accountable and qualified is doing the work. The cooling-off period gives time to check all of that without pressure. Together, they move risk away from the party with the least information.

Red flags worth walking away from

• A cash discount for skipping the paperwork. It usually means no written contract, no insurance and no recourse.
• A deposit above 10 percent, or pressure to pay before you have the insurance certificate.
• No HBCF certificate on a job over $20,000.
• A licence in a different name from the contract, or a licence for a different category of work.
• Payment schedules that run ahead of the work, with large amounts due before the work they relate to.
• Pressure to sign quickly, before you have read the contract or the Consumer Building Guide.

Questions to ask before you sign

1. Can I see your contractor licence, and does it cover this work?
2. Is this contract based on the standard NSW form, or your own? Where does it differ?
3. When will I receive the HBCF certificate, and in whose name is it?
4. What is the deposit, and how do the progress payments line up with the stages of work?
5. How do you handle variations, and how are they priced?
6. What happens if you find a hidden defect during the work? See our post on hidden defects during renovation.

How we approach it

We use written contracts that meet the Act on every job, keep deposits within the limit, and provide the insurance certificate before asking for any payment. Licences and insurances are current and in the name you contract with, and variations are agreed in writing before the work is done. See our Legal & Licensing policy for the detail, and our post on statutory warranties and defects after handover for what protects you once the job is finished.

If you would like to talk through a contract before you sign it, get in touch.

Sources

• Home Building Act 1989 (NSW), NSW Legislation
• Contracts for residential building work, NSW Government
• Home building contracts to download, NSW Fair Trading
• Consumer Building Guide, NSW Government
• HBCF: what am I covered for?, icare NSW
• General building work licences, NSW Government
• Home Building Act 1989 sections 7, 7AA, 7AAA, 7BA, 8 and 92, AustLII

This article is general information, not legal advice. Thresholds and requirements can change, and how they apply depends on your contract and your project, so check the current rules with NSW Fair Trading and get legal advice before signing. Full website disclaimer