What is a preliminary agreement?

This preliminary agreement can cover work such as preparing plans and specifications, attending site inspections, or obtaining foundations data. To safeguard against the risk of not being paid for the initial work, here’s when and how to use a preliminary agreement.

When to use a preliminary agreement?

You can use a preliminary agreement to complete work that needs to be undertaken before a domestic building contract is entered into. This could include works such as:  

• Preparing plans and specifications if the value of that work is less than $10,000.  
• Obtaining planning approval.  
• Obtaining foundations data (soil test, engineering footings design, etc).  
• Design work by an architect or draftsperson.

What should I include in a preliminary agreement?

Ensure that all parties’ obligations are clearly set out including:

• the scope of the preliminary works 
• when the preliminary works need to be completed by
• what happens if the agreement is terminated 

HIA has a preliminary agreement available for purchase through Contracts Online that sets out all the terms for you.  

What happens if I am outsourcing my work to external architects, draftsmen and/or engineers?

Any work that is contracted out to third-party architects, draftsmen and or engineers will not be considered as domestic building works. Therefore, you will not need to be concerned with the contracting laws under the Domestic Building Contacts Act 1995 (Vic) (DBCA).

You can still engage the owner through a preliminary agreement or pre-construction agreement. You may even wish to speak with a construction lawyer to draft a bespoke agreement if your initial building works are not subject to the DBCA. Search our Victorian construction lawyer directory.

Do the deposit rules still apply?

If your initial building works amount to $10,000 or more, you will be subject to the same deposit rules. For example, if your initial building works are below $20,000 the maximum deposit that can be requested is 10% of the contract price. Whereas the maximum deposit is 5% of the contract price for a contract price of $20,000 or more. 

If your initial works fulfil the requirements under a preliminary agreement, then deposit rules do not apply. HIA recommends that you request a reasonable deposit to ensure that you maintain a cooperative relationship with the owner and as a matter of fairness. 

I keep hearing about other builders using small works contracts in place of a preliminary agreement. Does this apply to me?

This is only applicable if the building works under a preliminary agreement exceeds $10,000.

Once you exceed $10,000 you will need to: 

• Execute a Small Works Contract or another major domestic building contract 
• Adhere to the deposit rules; and  
• If the value of the contract is $20,000 or more, you will also be required to pay the First Resort Home Warranty Scheme (FRHWS) insurance premium within 10 business days after the contract has been signed.  

A failure to pay FRHWS insurance premium within the stated timeframe will result in significant penalties issued by the Building and Plumbing Commission (BPC).

The above is intended to provide general information in summary form. The content does not constitute specific advice and should not be relied upon as such. Formal advice should be sought by members and customers with respect to particular matters before taking action.