Navigating Building Contracts

With continued low numbers of existing properties coming on to the market and with the recent increase in interest rates, we are seeing more and more build contracts being a preferred method of purchasing property for home buyers and investors alike.

There are many things to watch out for prior to entering into build contracts. We recommend people take full legal advice before signing.

Fixed Price Contracts

A common type of Build Contract is a fixed price contract. The purported certainty of a fixed price contract is the main factor in their popularity however, despite the name they are rarely ever fixed price, and furthermore can even present uncertainties within other aspects of your build.

Most fixed price contracts will contain Provisional Cost Sums (PC Sums). PC Sums are an estimated amount for a specific part of the building works which are not yet established or defined in enough detail to be able to accurately price at the outset. This means that they are subject to change. To avoid too many PC Sums in a contract it is important to have the plans and specifications as final as possible prior to signing. Limiting the number of PC Sums will provide more certainty on price.

An example of a PC Sum in a “fixed price” contract could be the foundations. The contract may specify that piles are to be rammed in at a certain depth and therefore piles of a particular length have been priced. Subsequently, if the engineer determines that they need to be deeper, longer piles will be required resulting in a higher PC Sum. Recent volatility in the market for building materials and supply chain shortages add to the uncertainty associated with PC Sums. It should also be noted that where there are any variations made to the agreement, these variations will usually incur a margin cost, to be specified in the contract.

Commonly Recommended Safety Nets for all Contracts

It is important, for certainty, that the contract specifies a timeline, specifically a start date for works and a completion date. One way for enforcement of this completion date is for a contract to contain a “liquidated damages” clause. This is usually a weekly discount that is applied where a build goes over completion. It should ensure that the costs provide some compensation to the person whose move in date is delayed and should also provide sufficient incentive for a Contractor to complete the project in a timely manner. We also recommend people ensure that aspects of the timeline are well defined, such as when the project has reached Substantial Completion.

Parties should specifically ensure that there is adequate certainty around payments, such as when they are to be made, what the process is for extra payments or how the liquidated damages payments shall be incorporated into the payment calculations.

An example of the weekly liquidated damages could be the costs of your rent per week. Therefore, if you are unable to move in by the completion date you will at least be able to seek your costs for the additional rent incurred.

We generally recommend that within the contract there is a clause in relation to defects. Which should, as far as reasonably possible, define what is covered as a defect, and a timeframe for raising such issues. There are various guides to what can be determined to be a defect, along with the tolerances in this area, for example here. For such clauses to apply, defects must be the result of the Contractor’s work, and for this reason, we caution clients about taking early possession of their new build.

In conjunction with Defect issues, it is common (and highly recommended) that there is a guarantee associated with the works, e.g. MasterBuilders 10-Year Guarantee. This should provide owners with a level of protection for certain issues with the build in future after various time limitations under the Contract have expired.

Further Considerations

Of further importance is to set out the roles of the parties in the project. Who will obtain Resource Consents and Code of Compliance certificates? This will involve communication with Local Councils. It is also ideal if the initial liability for payment of these matters is specified within the contract so that neither party will have to bear unexpected costs. There are sometimes responsibilities that rest upon the client, such as organising utilities, services and sometimes even the design work.

These features are commonly included in building contracts, and should be considered before signing:

• The responsibility for insurance, and what type of insurance is required.
• Their Notice address, it should be ensured it is an address which will get to parties in a timely manner.
• The materials in the specifications are those they agreed to.
• Whether the project includes landscaping, and other matters such as driveways and vehicle crossings from the road to the property – existing or to be built.

There are some interesting intricacies of Build Contracts, whatever the type. DTI Lawyers has extensive experience dealing with building contracts, and general property matters. Contact our specialist team of Property Lawyers at reception@dtilawyers.co.nz.