Builders don’t get paid. Frequently. It’s a fact. Every day small claims courts hear stories of builders not getting paid. Did you know the building and construction industry makes up over 20% of all insolvencies in this country?
Read this case study about a builder who didn’t get paid and get educated on how you can avoid cash flow challenges and legal headaches.
We’ve changed his name but this is a true and classic story that is heard in court and by construction lawyers almost every day.
As a building and construction lawyer myself, I find this a maddening because I know easily builders can avoid these legal issues if they had the proper paperwork in place.
Case study: Dave the Builder
Dave is a small builder in Sydney’s eastern suburbs. Like most of my clients, when I first met him he described his small business as being successful.
- He has more than 15 years’ experience on the tools.
- He has more than 10 years’ experience running his own business.
- He has 5 permanent staff.
- He turns over about $2m revenue on average per year.
- He has repeat customers.
Reading this, you too might describe him as a successful builder and when we look at Dave’s business systems it all seems fairly standard:
- Dave spends most of his time managing work and being on the phone
- He does his own quotes and contracts and uses business systems that he learned from his old work
- He uses accounting software for small jobs and estimating software for big jobs.
Now let’s look at the time when Dave didn’t get paid
Dave was working on a residential home renovation. Two months into the job, he puts in a progress claim for the variation work he completed. Work he received approval for via email from the client: “I can’t wait to see it, go ahead” the email simply said. The variation claim totaled $3,000.
However, the client didn’t agree with paying Dave for the variation claiming: “I did not understand I would be charged for this extra work” and pointing out that Dave’s building contract requires his variation work to be approved in writing by by the client.
At this point, Dave suspends work and contacts me, his construction lawyer. He presented his hand written contract, a standard contract template and a copy of his progress claim. His client’s lawyer sends me a notice for breach of contract.
Here is where Dave went wrong
1: He did not complete his contract properly. His price breakdown was wrong with the biggest concern being the contract deposit was treated as part of the contract price. The contract also specified the deposit was to be returned at the end of the contract. This immediately put Dave out of pocket by 10% of the contract price.
2: Dave did not prepare a compliant progress claim. Dave used accounting software that makes generic, not industry specific, claims. He was not aware that the building and construction industry has strict rules about progress claim procedures. As a result, his client’s lawyer justifiably claimed Dave was in breach of contract for unlawful suspension of work.
The snowball effect
Great relationships are essential to the success of any business. As a result of Dave’s client relationship falling apart, the client then complained about Dave’s lack of compliance. He was then issued notices from the government exposing him to serious penalties including hefty fines and jail time.
Instead of making money, he was now spending a great deal of his time putting out legal fires. He was still out of pocket for his claim and had an angry client who was complaining to WorkCover and taking him to Fair Trade with a complaint against his builder’s license.
How successful builders avoid legal headaches
1: Successful builders understand the essentials of a good contract and make sure their systems are contractually compliant with Australian Standards so that they are not in breach of their contractual obligations
2: They avoid paper “tick a box” templates and use industry compliant systems that add value to their business communication and bottom line.
3: They avoid double handling and costly errors by using building and construction security of payments software to get them paid on time and for the right amount.