In recent months, one of the most common enquiries that we have received has been from homeowners who have prepaid for residential construction works which have not been completed. With the significant impact of Covid-19 on Australian businesses, we expect that the frequency of these enquiries will only increase. As businesses struggle to survive, we are predicting an increase in:

  1. homeowners being asked to prepay for works to assist their builder with their poor cash flow; and
  2. homeowners being left out of pocket with incomplete, prepaid works due to the change in market conditions.

Below, our Brisbane based construction solicitors answer your questions about prepayment of funds for residential building work.

Should you prepay for building works?

The simple answer is, no. Under the Queensland Building and Construction Commission Act, a builder must not claim an amount under a contract (a progress payment) other than a deposit unless the amount is:

  1. directly related to the progress of carrying out the subject work; and
  2. is proportionate to or less than the value of the work that relates to the claim.

Your building contract will tell you when your builder is entitled to funds and will outline their entitlement (excluding variation costs). Your building contract will generally be broken into six stages, which are typically:

  1. deposit;
  2. base;
  3. frame;
  4. enclosed;
  5. fixing; and
  6. practical completion.

You should not make payment until the relevant stage has been completed. In our experience, prepaid payment can (and far too often does) result in lengthy and costly legal proceedings for homeowners trying to recoup their lost prepaid funds. Although you may trust your builder and may believe that you are doing the right thing, the market is uncertain. A well-established building contractor can fall into financial distress within a number of days.

Below we will explore your options, including whether you may be entitled to assistance under the Home Warranty Scheme.

What is the Home Warranty Scheme?

The Queensland Home Warranty Scheme is administered by the building and construction industry regulator, the Queensland Building and Construction Commission (“QBCC”). The Home Warranty Scheme is intended to provide homeowners with a level of insurance for certain types of loss sustained in connection to their building contract.

To be covered by the Queensland Home Warranty Scheme, you do not have to do anything. If your works are covered by the Scheme, you should receive a notification from the QBCC providing you with details of your builder, the work that they have agreed to undertake for you and the premium paid by the builder under the Home Warranty Scheme.

The Home Warranty Scheme predominantly provides coverage for:

  1. the non-completion of residential construction work; and
  2. the failure of a builder to rectify defective construction work.

In cases of non-completion, if your builder fails to complete the construction works described in your contract, you may be eligible to seek assistance under the Home Warranty Scheme. If successful you may be entitled to:

  1. if works have commenced – assistance equal in value to the cost of completing the works, less any progress payments outstanding under the contract; or
  2. if no works have commenced – the return and refund of your deposit.

Does the Home Warranty Scheme cover loss suffered as a result of prepayment?

The Queensland Building and Construction Commission Regulation provides limitations on the right to payment from the QBCC under the Scheme. Relevantly, schedule 6, regulation 7(5)(b) states that any assistance available to homeowners for incomplete residential construction work will be reduced by:

“…if the consumer makes a payment to, or for, the licensed contractor for the work before the payment is due under the contract—the reasonable cost of completing the work for which the payment was made…”

For homeowners, this means that if they have prepaid for works under the contract which are incomplete, they will be unable to have the cost of completing those prepaid works covered by the Home Warranty Scheme.

Are there any other options available to recover funds?

You may have the option of pursuing a cause of action against the builder to recover the prepayments. However, whether such an option is available to you will depend on your contract and the facts of your matter. If you are unsure of how to proceed, you should consider booking an initial consultation with one of our Brisbane based building and construction lawyers. Get in touch today on 07 3269 4888.