The key to a successful building project, long before the foundations are excavated, is choosing the right type of contract. Harvey Grennan lays it on the dotted line.

If you are planning to build your own home, one of the first things you need to consider is what type of contract to enter into with your builder.

The most common arrangement is a 'lump sum' contract, in which the builder agrees to build a house according to the plans and specifications for a fixed price, subject to certain variations. Typically, extras may include site costs (for example, if it turns out you need deeper foundations) and kitchens and bathrooms that exceed the 'prime cost' allowance. So, if the contract allows $40 per square metre for bathroom tiles and you happen to fall in love with those cool $100-a-metre Italian mosaics, you'll pay the difference.

'Design and construct' contracts are similar, except that the builder is also responsible for arranging the design of the house according to your brief. These contracts can be novated, a term that refers to replacing one of the parties in a contract, so you can choose an architect or designer to prepare the first concept plan and have a builder take it from there.

Yet another way of building your dream home is project management. Under this system, you pay the project manager an agreed fee to call tenders for each trade, organise all services and supervise construction. Normally you enter into a direct contract with each subcontractor after evaluating the tenders, but this can also be delegated to the project manager. The benefits are that work can start earlier, you can monitor your budget as construction progresses and you can choose your own subcontractors.

My favoured approach is a 'cost plus' contract, but it's not for amateurs. In this situation you pay for all materials and labour as the bills arrive, plus a margin to the builder - perhaps 15 or 20 per cent of the total cost or an agreed fixed amount. For the builder, it's a risk-free profit as you are responsible for all the costs. If you have an honest and competent builder, the benefits to you are several. For some jobs, such as an unconventional design or the renovation of an old house, the builder would inflate any lump-sum quote to cover unforeseen problems. Under cost-plus contracts, you avoid this loading and just pay for work done. Also, you're free to alter the design or materials or finishes as you go along, without paying for expensive variations.

A 'cost plus variable percentage' contract might deliver the best of both worlds. Here, the contractor agrees to a penalty if the actual cost exceeds the estimated cost, or a reward if the actual cost comes in below the estimate.

The big ask
Six critical questions to put to builders:
What is your licence number?
Can I see examples of your work?
Do you have all the necessary insurances in place?
When can you start and how long will the project take?
What are the progress payments?
Will I have access to the site during the building process?

Before you sign...
"You have the sole power to decide what type of contract should be used and what terms that contract should contain," says Robert Van Aalst, Principal Solicitor of Sydney practice Lawyers Central. "It's important that you understand the risks, obligations and responsibilities. If they are not clear to you, take the time to seek advice."

This article is general advice only; readers should seek professional adivce regarding legal contracts.