Paying your builder outside the agreed progress payment schedule in the Contract otherwise known as Method B – especially paying too much, too early – can leave parts of your build uninsured under your Domestic Building Insurance (DBI) and expose you to serious financial risk if something goes wrong.
What is Domestic Building Insurance (DBI)?
Domestic Building Insurance (also called builder’s warranty insurance) is compulsory for most residential building work in Victoria over $16,000. It is designed to protect you if your builder dies, disappears, becomes insolvent or, for newer policies, fails to comply with a final VCAT or court order.
DBI generally covers
- Non-completion of the building work up to a percentage of the contract price (subject to a monetary cap).
- Costs to fix structural defects for 6 years and non-structural defects for 2 years after completion or termination.
Critically, builders must obtain DBI and give you a copy of the policy and a certificate of insurance before taking any money under a major domestic building contract.
Why progress payment schedules matter
Your domestic building contract will set out a progress payment schedule – percentages or fixed amounts payable at each stage (base, frame, lock-up, fixing, completion, and so on). That schedule is not just a convenience: it is part of the legal framework that protects you from overpaying and helps ensure your DBI responds properly if there is a problem.
Paying in accordance with the schedule means:
- You “pay for what you have received”, not for work that is still to be done.
- Your payments align with the insured contract price and the stages the insurer expects to see if a claim later arises
- Regulators and insurers can readily trace how much of the contract price has been paid and what work was complete at each stage.
By contrast, ad-hoc payments, lump-sum advances or “cash top-ups” outside the contract often sit outside the structure DBI is designed to insure.
How paying outside the schedule can jeopardise DBI
Paying outside the agreed progress payment schedule can unintentionally reduce or even eliminate the insurance protection you thought you had. Key risks include:
- Uninsured deposits or advances – DBI cover generally starts from the date of the contract or building permit, and applies to payments made under that contract once the policy and certificate are in place. If you make payments before the contract is signed, before DBI is issued, or for amounts not contemplated by the contract (for example, a large “side arrangement” payment), those sums may fall outside DBI cover.
- Overpayments beyond insured contract price – DBI “non-completion” cover is typically calculated as a percentage of the contract price, subject to a dollar cap. If you pay more than the contract price (or significantly earlier than scheduled), you risk having part of what you have paid treated as uninsured overpayment or unsecured credit to the builder.
- Difficulty proving loss to the insurer – When payments don’t match the contract stages, it becomes harder to show the insurer what work was paid for, what was actually completed and what remains outstanding. That confusion can delay or complicate DBI claims – and in some cases may lead to a dispute with the insurer about how much they are required to cover.
- Insurer relying on “paying too far ahead” – Consumer guidance warns that paying too much up front or in advance of completion may result in DBI cover not extending to those advance payments. An insurer may argue that money paid for work not yet done is outside the intended scope of DBI, or that the loss is partly due to your decision to depart from the contractual safeguards.
In practical terms, if your builder becomes insolvent after you have paid significantly ahead of the schedule, DBI may only cover a portion of your loss, leaving you out of pocket for the “extra” amounts.
Other financial and legal risks of paying early
Beyond insurance, paying outside the schedule creates a range of additional risks:
- Greater exposure if the builder collapses – Where deposits or advances are not covered by DBI, you may be treated as an unsecured creditor in the builder’s insolvency and recover little or nothing.
- Reduced leverage to insist on quality – Progress payment schedules give you leverage, you can legally withhold payment until a stage is properly completed. If you have already paid ahead, your ability to insist on defect rectification or timely progress is reduced.
- Potential breach of the contract or legislation – Major domestic building contracts and Victorian consumer laws impose rules about maximum deposits and proper staging of payments. Departing from those rules can expose both you and the builder to legal consequences, and may complicate any later dispute in VCAT or the courts.
Practical tips before you pay your builder
If you are about to make a progress payment – or your builder is asking you to pay outside the schedule – consider the following steps:
- Check that you have received a copy of the DBI policy and certificate of currency for your specific property before paying any deposit or progress payment.
- Confirm the amount claimed matches the stage described in your contract and that the work for that stage is genuinely complete.
- Avoid “side agreements”, cash payments or lump sums that are not clearly documented as part of the written contract.
- Do not pay in advance for future work or materials unless you have obtained independent legal advice about the risks – including the impact on your DBI cover.
- If you are unsure, pause and seek advice before transferring funds, especially where the builder is under financial stress or asking to “reshape” the payment schedule.
A short review of your contract and insurance documents at this stage can prevent a costly gap in coverage if something later goes wrong.
If you have a domestic building contract and would like to understand the risks around your progress payments and DBI insurance, our office can review your contract and advise you before you pay the next instalment. Please contact our team to arrange a time to discuss your building project and payment schedule arrangement should you have any concerns.
