Preliminary Agreements
Preliminary agreements are often treated as informal or low-risk documents in residential construction, but they can carry significant legal and financial consequences if they are not structured properly. Homeowners frequently assume that these agreements sit outside the main building contract and outside the statutory framework, when in reality that is not always the case.
A preliminary agreement is, in simple terms, an agreement to carry out certain work before the main building contract is entered into. That work might be preparatory in nature, but whether the Domestic Building Contracts Act 1995 applies depends on the type of work being performed, not the label placed on the agreement. If the work covered by a preliminary agreement is domestic building work to which the Act applies, then the agreement needs to comply with the Act in the same way as a standard domestic building contract.
This becomes particularly important where the value of the preliminary works exceeds the statutory threshold for a Major Domestic Building Contract, which is currently $10,000. If a preliminary agreement contract price exceeds the threshold, and the work falls within the scope of domestic building work, it MUST be a Major Domestic Building Contract. While preliminary agreements can have slightly different features to a full construction contract, they must still comply with the statutory requirements where the Act applies.
A common example of a preliminary agreement is an arrangement for the preparation of plans and specifications, particularly on custom builds where plans do not yet exist or require significant development. In some cases, builders offer to prepare drawings or specifications as part of a preliminary phase before the full contract is signed. However, plans prepared by an architect fall outside the Act, whereas plans prepared by a builder may not.
One of the most important issues with preliminary agreements is whether they are truly separate from the main building contract or whether they are effectively tied to it. If a preliminary agreement refers to the main contract, such as by stating that the fee is calculated as a percentage of the eventual contract price, this can indicate that the agreement is not genuinely standalone. Similarly, where a preliminary agreement is signed at the same time as the main contract, this may point to the agreement being a collateral agreement rather than a separate preliminary arrangement.
A range of factors can influence whether a preliminary agreement is treated as independent or as part of the broader contractual arrangement. This distinction matters because it affects how the agreement should be structured and which statutory requirements apply. If a preliminary agreement is tied to the main contract, it may be governed by the same contractual framework rather than standing alone.
Where a preliminary agreement relates to work that falls within the scope of the Domestic Building Contracts Act, homeowners need to understand whether the agreement is genuinely separate from the main contract. If it is not tied to the main contract, it will usually need to exist as its own domestic building contract and comply with the Act in its own right. Preliminary agreements can be legitimate and useful, but only when their legal status and consequences are clearly understood before anything is signed.