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What is a preliminary agreement
To attend to these preliminary items, a builder may have to spend substantial amounts of time and money. This is often at significant out-of-pocket expense in a situation where the owner may later withdraw interest from the project because of, for example, a change of heart.
To safeguard against the risk of not getting paid for the “preliminary” work done, it is recommended that you first enter into a separate written agreement with the owner. This is often in the form of a preliminary agreement.
What is a preliminary agreement?
The purpose of a preliminary agreement is to be a service agreement of a commercial nature.
Preliminary agreements are not residential building works and should not be referred to or mentioned in your scope of works under the residential building contract.
When should I use a preliminary agreement?
A written preliminary agreement can be used to set out:
- items that need to be undertaken prior to commencing residential building works (e.g. getting plans and specifications drawn up or obtaining the appropriate council approvals); and/or
- other works that do not fall within the scope of the Building Act 2004 (ACT) (Building Act) and that need to be carried out prior to commencing residential building work.
What should a preliminary agreement include?
Consider the following when using preliminary agreements:
- clearly state that the preliminary agreement is contractually binding;
- ensure that the obligations of both you and the owner under the agreement are clearly described such as:
- What is the scope of the preliminary works?
- When are the preliminary works to be completed by?
- How can the agreement be terminated?
Key points to remember when using a preliminary agreement
- ensure the scope of works does not cover any ‘residential building work’ defined under the Building Act;
- keep your preliminary agreement separate from your residential building contract;
- do not execute the preliminary agreement at the same time as the residential building contract; and
- ensure the amount you claim under the preliminary agreement is relevant only to the preliminary works and not expressed as a percentage of the future residential contract or as an ‘initial deposit’ for the later residential building contract.
You can offer a credit from the contract price (of a future residential contract) for any amount paid under the preliminary agreement to entice the homeowner to appoint you as their builder.
HIA always advises its members to enter into formal written contracts before any construction works commence. HIA have preliminary agreements available for purchase that set out all of these terms for you.
To find out more, contact HIA's Contracts and Compliance team
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