Episode 56: Professional Builder Contracts With Paul Rojas

In episode 56 of the Professional Builders Secrets podcast, we’re joined by Paul Rojas, Managing Partner at RCR Lawyers. Throughout this episode, Paul explains the importance of a properly defined building contract and how it can help your building company with the ever-changing costs in the industry.

 

Inside episode 56 you will discover

• How to make sure your building contract has a cost escalation clause
• That it is your right under the contract to suspend works if you’re not getting paid
• Why sitting down with your lawyer at least once a year is important
• How the more transparency included in your contract surrounding variations can save you time, money and possible court appearances
• Why copying and pasting a building contract from the internet is a detriment to your business
• And much, much more.

Listen to the full episode to uncover exactly what you need to be incorporating into your building contracts to mitigate risk and set your building company up for success.

 

Paul Rojas - Managing Partner at RCR Lawyers

 

Quality delivery and client focus are at the forefront for Paul, Managing Partner at RCR Lawyers. Paul also heads up the Commercial Litigation practice for the firm, and is a key driver of the firm’s overall development, growth and innovation. Backed by a wealth of experience, Paul can help you with any contractual disputes, trade practices and refining your building contracts.

Connect with Paul

 

Timeline

1:41 About Paul Rojas 

3:23 How to continually improve your building contracts 

8:22 The consequences of leaving your risk management unchecked 

9:53 How to ensure you get paid 

21:27 Why talking to a lawyer early can save you time and money

 

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Paul Rojas:

The construction industry has the largest number of insolvency events and a large number of disputes.

Paul Rojas:

The homeowner’s not only going to go sue the subcontractor, but they're also going to go sue the builder.

Paul Rojas:

You can't put a quote for a contract build today and expect that the cost is going to remain the same in three months' time.

Paul Rojas:

Prevention is always better than the cure, and they'll actually save themselves a lot of, not just cost, but a lot of heartache and a lot of effort.

Paul Rojas:

The number of times I've seen builders in breach of their own terms and conditions because they haven't read their contract.

Paul Rojas:

And they'll go download a contract off the internet and they won't read it and they just start signing away.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets Podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here, we discuss all things running a professional building company from sales processes to financials, operations and marketing. We have another exciting episode from the Professional Builders Secrets Podcast. I'm joined today by Paul Rojas, Managing Partner at RCR Lawyers [Rostron Carlyle Rojas Lawyers]. Paul, lovely to have you here today.

Paul Rojas:

Yeah, thank you, Bosco. Thank you for the open invite.

Bosco Anthony:

Well, Paul, why don't we get into it? Tell us a little bit about what you do and specialise in for our listeners out there.

Paul Rojas:

Yeah, sure. I'll say a commercial litigation lawyer, but a large part of my practice is construction, construction litigation and insolvency. Within construction, given the industry that we're in with construction industry has a large number of disputes, construction litigation is a big factor.

Bosco Anthony:

When you say there’s a large number of disputes across all other industries as well, is that what you find?

Paul Rojas:

Compared to other industries, I would say that the construction industry has the largest number of insolvency events and a large number of disputes, simply because you have large projects and various competing interests. You have architects, builders, homeowners and designers all factored in together for the one contract and in human nature, competing interests always result in disputes.

Bosco Anthony:

Which is a very important reason why you need to have a really locked-in solid residential builder contract, which we'll get into. But let's start off with what are some of the current trends and issues that you're seeing affecting residential builders and in turn, their contracts that they have in place?

Paul Rojas:

This year I would say that as of probably March, April, activity has increased massively in terms of builders. We're getting contacted every day by builders needing amendments to their contracts for cost escalation clauses. We're also getting contacted by homeowners wanting advice because they have a builder who's trying to push forward for some extra costs. Unfortunately, in the industry that we're in, given the current market conditions, there is a huge increase in cost for materials and labour. And unfortunately, the builders are stuck in that position where they have to either try to push those costs onto the homeowner or wear those costs themselves.

Bosco Anthony:

Right. And it puts you guys in a dilemma too, because in both scenarios you're trying to do the right thing by both. Can building contracts be modified?

Paul Rojas:

Yeah, definitely. Most builders these days have industry standard contracts, which are very good contracts, for example, like massive builders or HIA [Housing Industry Association]. But I will say 80 to 85% of those industry standard contracts these days are amended with special conditions. So, you tally that contract to suit your business and your requirements and protect yourself and your business.

Bosco Anthony:

Are builders aware that these contracts can be modified, residential builders?

Paul Rojas:

Most builders these days are aware. It's very rare that you get an industry standard contract these days that has not got a special condition in there, particularly now with the market conditions. Most of the amendments are cost escalation clauses, which is also like a rise and fall clause or an EOT, extension of time for COVID, which is unfortunately, what's happened over the last few years and has really caused a lot of builders to have a rethink about their terms and conditions and their projects and how to look after themselves.

Bosco Anthony:

Should residential builders go with a higher number than the recommended margin on a contract? What are your thoughts around that?

Paul Rojas:

With the whole builder's margin concept, there's no legislative requirements as to how much you can put down. It's more of a contractual negotiation between the homeowner and the builder. For example, with HIA or Master Builders, they have a recommendation of 20%; APB recommends 25%. That really comes down to the builder, the homeowner and negotiating when they're completing the schedule to the contract, if they agree on 25%, it becomes a contractual provision under the contract.

Paul Rojas:

But given the market conditions, 25% is probably more reasonable under the current circumstances.

Bosco Anthony:

Right and I know for our listeners out there it's really important to mark the difference. One of the first lessons I learnt with APB is the difference between markup and margin. So, the markup is the amount of profit as a percentage of your cost of sales and the margin is the amount of profit as the percentage of your revenue. Most of the time these numbers get really misconstrued and people end up not knowing the difference between the two.

Bosco Anthony:

I believe the standard for APB, which is 25% in order to turn a profit, if you're adding a 25% margin, then you need to technically mark up by 33.3% and APB members do this and rarely have an issue with their clients when they raise their markup by that 33.3%. It's simply an objection that can be easily accounted for. Having said that, I don't think everyone looks at it that way or considers the fact that a markup and a margin aren't the same thing.

Paul Rojas:

Yeah, you're exactly right. You'd be surprised by the number of builders who get it wrong. They put down a markup when it should be a margin and vice versa. Really, it's up to the builder to understand their contract provisions and the terms and conditions and then apply them properly under the contract. Otherwise, you're cutting into your own profit margin, your own bottom line really. Understanding how to apply the builder's margin and understanding when to apply the markup are very important.

Bosco Anthony:

Right, and if you don't have the right markup in place and the cost starts to increase, that's when we're seeing a lot of the problems start to fall into play, isn't it?

Paul Rojas:

Yeah, a hundred percent. And that's standard to have a markup and a builder's margin. But more importantly now, more than ever, is having that contractual right to bury the cost escalation clause, which is a whole other concept or whole other clause on its own.

Bosco Anthony:

So, what are some of the escalation clauses or fees that people need to be aware of in these contracts outside of the markup and the margin side of things? Is there anything else that they should be aware of?

Paul Rojas:

I said before about the market conditions, and as an example, I saw a builder the other day who was telling me that the cost of timber has doubled in Victoria. So, you sign up a contract and you’ve got your materials and your suppliers, if it's outside the builder's control – for example, I might sign a contract today, but the builder doesn’t want to start the works until six months from now – the cost of materials can increase dramatically over the next three to six months. So, what happens to the builder in that situation – are they going to wear those costs of material and supplies or they're going to have a contractual right in their contract to push those costs onto the homeowner?

Paul Rojas:

That's the whole point of the cost escalation clause. The term is if there's been a significant price increase, you have the contractual right to send a notice to the homeowner saying, "Under the current situation, the price of steel has gone up by X amount of dollars. Pursuant to the clause, I'm going to exercise my right to increase the cost for the price of steel,” for example.

Bosco Anthony:

Right and that's just to cover the outrageous amount of expenditure that might come out of the supply chain. Because again, no one has control of these things in the country or worldwide as well, or especially with current times. Right?

Paul Rojas:

Yeah, exactly. Currently, we've got COVID, we’ve got wars in various different countries and so forth. The cost of materials is just so volatile at the moment. You can't put a quote for a contract bill today and expect that the cost is going to remain the same in three months' time.

Bosco Anthony:

So, why should residential builders pay attention to risk management in today's world? It sounds like all you do today is really manage that risk consulting with your clients, but why is it so important? Why is it a big topic of conversation?

Paul Rojas:

I always say with builders in the construction industry, their profit margin is quite minimal to start with. They have got a multi-million-dollar development, but their profit and their margin are quite low. So ensuring that you can actually maintain that profit, that bottom line, is such a very big thing these days. So, you must have that contractual right, as I said before about the cost escalation clause for example. I've got an example of a couple of builders who I've been dealing with. If you signed 10 or 15 contracts for the year, and they've all increased by 10 or 15% and you can't contractually push those costs to the homeowner, well then, the builder's in a very awkward position.

Bosco Anthony:

Why do you think this has escalated so much in the last two months? Is it just during just the current times where the scenarios have just hyper-increased? What do you think is contributing to you guys getting a lot of phone calls from the builders saying, "We need help?"

Paul Rojas:

Yeah, it's definitely the supply chain situation. So, in current market conditions, the cost of labour has increased and the cost of materials has increased. It's something that is not going to get any better over the next 12 months or so. It's likely going to get worse. You probably see the news: there's a lot of construction companies going into liquidation these days and it's got to the point that there's going to be a large increase in insolvency in the construction industry by the end of this year.

Bosco Anthony:

Wow. I don't think any builder's prepared for that either, so it really comes as a surprise to them as well. Let's talk about some of the risks that builders need to be aware of when it comes to building their residential building contracts, especially for the listeners out there who are either new to this or need to change their current contracts. What advice do you have for them and what are the things that you want them to look for in their contracts?

Paul Rojas:

Particularly with builders, what happens so often is that you get a builder who's put forward a progress claim and then a homeowner doesn't pay and what does the builder do? They keep continuing with the works. And before you know it, I always say to builders that if you have a client who doesn't pay the second progress claim, what makes you think they’re going to pay the fourth one? By time they actually make a decision, they've already carried out more work, they’ve still got their overheads and they've spent a lot of money in trying to finish a job and they still haven't been paid for the next two or three months and before they know it, it's dragged on for longer than 90 days. And that pauses the cash flow in the construction industry.

Paul Rojas:

The cash flow is if the builder can't pay because the homeowner hasn't paid, then the builder can't pay the subcontractor, the subcontractor doesn't pay the wages of the labourers and they can't pay the suppliers and it causes the insolvency event. So, the biggest thing for builders these days is to understand your right under the contract to suspend the works if you're not getting paid.

Bosco Anthony:

When you talk about the payments, you're talking about the milestone payments, right? So, you have different milestones.

Paul Rojas:

Progress payments exactly, yeah.

Bosco Anthony:

Right.

Paul Rojas:

So, for example, you're done with the first stage, you issue your progress claim. You haven't been paid under the terms of the contract, so you should be issuing your notice to suspend the works and you are contractually, legally entitled to suspend the works, get paid and then recommence. Don't continue with the works, which nine times out of ten is exactly what builders do because they want to finish a job and then deal with the issue about payment afterwards.

Bosco Anthony:

Right and for our listeners out there, New Zealand, Canada and the US have already had clauses put into place. It's mostly Australia where we're seeing a lot of the challenges right now with the contracts. Is that correct?

Paul Rojas:

Yeah, exactly. This cost escalation clause is a new thing for contracts in Australia. At this stage there's no reported decision, so a lot of lawyers are amending these contracts and so forth and you get a lot of builders who are getting advice on them and it's a matter of ensuring that you do exercise your right. But at the same time there needs to be provision in there so it doesn't look, for example, like it’s an uncommercial clause or it doesn't look like it's an unfair contract term. It's something that will become more popular over the next 12 months or so. And I imagine as always, when there are amendments to various contracts, or various provisions, it's a good year or so before a case comes out about it, where it's going to be tested in court, so watch that space.

Bosco Anthony:

And Paul, do you find that builders outside of APB who really are our focus for giving this content out to, is this information readily available or do you find that builders end up getting surprised when they come and talk to people like yourself?

Paul Rojas:

We always get two types of builders and unfortunately most builders are the first type who only ever speak to a lawyer when something really bad has happened. They come to a lawyer with the worst case scenario, when something really bad has happened. I always say to the client, "Had you come to see me six months ago, we could have been in a better position."

Paul Rojas:

The other type of client or builder is the one who's more proactive and they want to sit down with a lawyer and say, "I've heard some horror stories about friends of mine, colleagues who have had various things happen. How can I protect myself to ensure that doesn't happen to me?"

Bosco Anthony:

I think there's a saying, you need to have one good barber, one good accountant and one good lawyer.

Paul Rojas:

What I always see in APB is that when you're running an effective business, you need to have, for example, a good accountant and you need to have a good lawyer. And as you sit down with your accountant every year to do your tax, so you should also sit down with your lawyer once a year to go through your contract and go through your business.

Paul Rojas:

So many times, I see builders who go and get some contracts prepared and then they don't change those contracts for seven or eight years. Then before you know it, the business has grown in size, their business has tripled and they're actually doing different kinds of construction works in different categories and that contract doesn't necessarily apply to them anymore, and legislation changes as you know as well. So, it's a smart thing to do; sit down with your lawyer once a year.

Bosco Anthony:

Yeah, and that's a best practice recommendation, right?

Paul Rojas:

Yeah.

Bosco Anthony:

It’s just to keep up with your business. What do you do when you're faced with a difficult situation with a client? And I'm sure you have some pot of gold stories and I'm sure our listeners would love to hear some examples of what you've seen. How was it dealt with and were there potentially some wins for the builder as well?

Paul Rojas:

Between builders and homeowners, nine out of 10 times when there's a dispute, it's about variations. There's always this misconception between the homeowner and the builder as to what is a variation and what is the actual original scope of works on the contract.

Paul Rojas:

For a builder, the more transparency and the more information they can provide to the homeowner about what is covered in a scope of works the better. And when they want to have a request to vary the contract, they need to actually do a proper variation notice and understand how it works on the contract. It's going to go a long way for them. Because otherwise, you're having a fight in QCAT [Queensland Civil and Administrative Tribunal] or in court dealing with unauthorised variations.

Bosco Anthony:

Right, and what do you do? I'll give you an example, which could be a common example here, but a client takes possession of their newly built home and then refuses to pay the balance. Is that a common scenario?

Paul Rojas:

It does happen. It's always, as I said before, where you have a builder who, if the homeowner's not paying by say the second or third progress claim, well then, they're not going to pay by the last one. That happens more often than not. The builder’s right under that situation is to simply terminate the contract and sue the homeowner for damages.

Bosco Anthony:

Right.

Paul Rojas:

In most contracts it’s in the general terms and conditions about early possession taken by the owner, which is a substantial breach of the contract.

Bosco Anthony:

Right. Are there any other common scenarios that happen in contracts with a client that builders need to be aware of or a common story that you've dealt with?

Paul Rojas:

A lot happens these days, unfortunately with builders that they're licensed, and they take the full responsibility for the project itself. You always get builders who are stuck in situations where they're not getting paid, but then they still have to pay the subcontractors, for example. So, it's always very important that the builder ensures that payment passes through on time. As I was talking about before, the cash flow is such a big thing because as soon as you don't get paid for one progress claim, it causes that domino effect as I always talk about. And you see a lot these days and that's what causes companies to go under in the first place.

Paul Rojas:

What you'll notice, if you look back seven years ago, is that it always happens like a cycle. You had big companies like Bloomberg Construction, you had a couple of other ones going under back then, and that causes a ripple of all these other smaller companies going under. Just recently you had ProBuild go under and a few other big ones, like Premium go under, which will set that ripple effect that will continue for the next six to 12 months.

Bosco Anthony:

You just talked about subcontractors as well. So, tell me a little bit about the legal obligations for a residential builder when it comes to those subcontractors. Because at the end of the day, it's such a moving target too, right?

Paul Rojas:

Unfortunately the builder takes all the onus and all the responsibilities. So, if there are any defective works which the builder hasn't carried out, the homeowner's not only going to go sue the subcontractor, they're also going to go sue the builder. They have the contractual right with the builder, so it's very important for the builder to have those subcontracts in place with their subbies [subcontractors]. So, if there is any issue with defects, that builder has the right to go after the subby and say, "Under the terms of the contract, you have to repair this, you have to go fix this, rectify the defects.”

Bosco Anthony:

Right, and in this world of today's uncertainty which doesn't seem to be changing, it seems to be the latest fashion trend, why is it so important do you feel that all builders should prioritise and focus on this today?

Paul Rojas:

It's important because it's eating into their bottom line. Like I said before, the margin, the profit margin for a building company, is really quite small from the outset. So not protecting that profit margin by having these contractor provisions under the contract is going to eat into your profit margin and into your cash flow and they'll cause a serious effect on your business.

Paul Rojas:

We are seeing some crazy horror stories. For example, I'm seeing homeowners who contact me where builders have tried to sneak in a cost escalation of say $65,000 to $70,000 as a variation. It's not a variation to the contract, but what can the builder do? They're trying to do whatever they can. So, they’re trying to negotiate, they’re trying to sit down, but if you don’t have that contractual right in your contract from the outset, well then you don’t have the right to claim for it.

Bosco Anthony:

When a new builder comes to work with you or says, “Look, we need help with our contracts,” take me through your process. Do you go through an assessment process? Do you go through a discovery to understand a little bit about the business? What goes into actually building this contract?

Paul Rojas:

Yeah. That’s a really good question, Bosco. When we have a builder sit down, as an initial consult, we ask all the questions about the company, what kind of work they do, what kind of licence they have, for example, whether kind of homes they build, what kind of contracts they’re doing. Contract price is a very big thing as well, whether they subcontract those contracts to other subbies or whether they have employees and so forth. It’s really sitting down and asking all those questions that will give you an understanding of what the client needs for that contract and discussing about special conditions.

Paul Rojas:

Another big thing is that a lot of builders might download a contract off the internet and they won’t read it and they just start signing away. But I always say a contract is like the rules of the game, and if you don’t know the rules of the game, well then, you're not playing it properly. You need to understand your contract and that's the biggest thing. If you sit down with me as your lawyer, I'll explain to you how your contract works and how to use that contract for your advantage. Don't just download a contract and sign away and not think about it. The number of times I've seen builders in breach of their own terms and conditions because they haven't read their contract.

Bosco Anthony:

I'm scared to ask, but have you ever encountered someone from one country download just a generic contract, but it's actually from another country?

Paul Rojas:

I've seen so many copy and pastes. They've amalgamated something that's just morphed into who knows what it is. You'd be surprised at the number of contracts that have come before me at my desk. 

Bosco Anthony:

What do you recommend builders should do to prepare for a meeting with someone like yourself or a law firm when it comes to them saying, "Okay, we need to get our contracts down, we need to renew it or look at it every year"? What type of preparation should occur so that they do this properly? And how does the working engagement work? Is it based on a set number of hours or is there a process? How do you work?

Paul Rojas:

For a builder to sit down with a lawyer, it should be on a simple consult or retainer arrangement. It's really important for the client just to be transparent with the lawyer and answer all those questions that need to be answered for the lawyer to get a better understanding as to what the client needs in the contract. Once your contracts, your special conditions, are prepared and you understand how they work, then it's for you to then use those contracts properly. Under a retainer arrangement we have, sometimes a simple phone call, a 10 or 15-minute phone call will resolve the issue and that phone call has actually helped the client to avoid the issue six months down the track, which would turn into a big dispute.

Bosco Anthony:

Right. I've got to ask this question and I think I know the answer: prevention or cure? Should we have a construction lawyer in our court, in our building company when we need help, or do we look for one when the problem is already escalated out of control? I'm sure you deal with both.

Paul Rojas:

I deal with both, and I've said before, there's always two types of clients. I do a lot more construction litigation, can I say, because unfortunately, most of those clients only want to talk to a lawyer when it's gone bad already, when it's hit the fan already. But prevention is always better than a cure, and they'll actually save themselves a lot of, not just cost, but a lot of heartache and a lot of effort. 

Paul Rojas:

Sometimes you can avoid a situation and not just because it's costly, but it kind of eats into your life. You're dealing with a litigation dispute that could have been resolved by having proper terms and conditions in place. Or you're in court fighting about oral representations when you should concentrate on what you do best and making more money and running your business rather than having a fight about something when it could have been avoided by having some simple terms and conditions in the first place.

Bosco Anthony:

Paul, what should builders look out for in the future? We've talked a little bit about the current times. We've talked about contracts. What are you working or focusing or researching on that builders should be prepared for that potentially could disrupt their way of work?

Paul Rojas:

As I said before, I think this obviously is going to be a big thing in the next, say, 12 months or so. It's going to happen in every industry. Construction industry is going to have a big hit. Unfortunately, we had COVID, which hit the world and it hit on two fronts. We had the health front and now it's going to be the economic impact.

Paul Rojas:

It was a good thing that the Australian Government did with all these Government fundings and benefits, but what it created was a term called ‘zombie companies’. It's companies that should not be trading. They should've been in liquidation six months ago, but for those Government benefits. You see a lot of those in the construction industry. A lot of that's now going to be, it has to be, I guess, a reset in the industry and in the economy. A lot of these companies will be cleaned up and moved forward into better times.

Bosco Anthony:

All right. So, there's a bit of a correction that's about to occur that will change the pathway. I'll call it the correction right now for safer reasons. Paul, tell me a little bit about you being an APB Preferred Partner as well. What does that look like for our listeners out there? Tell me a little bit about the arrangement that you have with them.

Paul Rojas:

Yeah, look, I'm very happy and proud to be a partner with APB, and we offer all the legal services and advice to all the members. If any APB member has any issue or any legal requirements, we are happy for them to contact us. It's a no obligation consult, at no cost at all, just a simple discussion. That's our commitment to APB and for any issues that come about, we're there to look after the members and help the members through these tough times.

Bosco Anthony:

Any final words of wisdom? I think you've given us quite a bit when it comes to what to look out for, but any final words of wisdom for our builder listeners out there?

Paul Rojas:

I feel like I've repeated so much about cost escalation clauses, but it’s really important to sit down with a lawyer and understand how it works. In some ways, it's the most important thing, and you'd be surprised once you know how to exercise your right for a cost escalation, how much it can actually help you in the long run. Don't put those costs on yourself, be smart and get the right type of advice.

Bosco Anthony:

So, know your rights, know what to look for accordingly and more importantly, like an accountant and all the other essentials out there, have a lawyer at hand. Treat it as if it's an annual check-up, right?

Paul Rojas:

Yeah, an annual check-up. Go see your doctor, go see your lawyer.

Bosco Anthony:

Awesome. Well, thanks so much for your time and your energy today, and we really appreciate the insights as well.

Paul Rojas:

Okay, great. Thanks, Bosco. Take care. Bye-bye.

Bosco Anthony:

Cheers.

Bosco Anthony: 

Thank you for listening. Remember to subscribe to Professional Builders Secrets on your favourite podcast platform and leave a review. To learn more about how the systems at APB can help you grow your building company, visit AssociationofProfessionalBuilders.com. See you next time.