How do NZCB Building Contracts Compare to Others? By Geoff Hardy

How do NZCB Building Contracts Compare to Others?

As a NZ Certified Builder, you have access to state-of-the-art building contracts that have been written with “fairness” as the guiding principle. They require the builder and the homeowner to act reasonably and not try to gain an unfair advantage over the other through underhand tactics.

For example, the builder is obliged to start the project promptly and to work diligently and conscientiously until it is finished. If it is a fixed price + contract then the builder must honour that commitment even if it involves making a loss, subject to his right to charge extra for variations, cost fluctuations and provisional sum adjustments. If it is a cost reimbursement contract then the builder must use reasonable care in calculating his estimate of what the project will end up costing, and he must keep the owner informed of how the project is tracking in comparison to the budget. And there are one and a half pages of warranties and guarantees that the builder gives to the homeowner, spelled out in the contract.

Those obligations are backed up by five separate laws through which homeowners can hold the builder accountable if he doesn’t achieve the standards expected of him, and many different ways in which they can enforce their rights and remedies. To top it off, they don’t actually need any of those laws or those enforcement methods in the event of a disagreement with their builder, if they can simply withhold payment of the latest invoice, which is usually a satisfactory solution as far as the homeowner is concerned.

To counter that, NZ Certified Builders contracts contain a number of safeguards to ensure that the builder will get paid for the value he has added to the owner’s property, subject to any disputes that need to be resolved. For a start, the homeowner promises to pay invoices when due, to not hold the builder up, and to cooperate with the builder when the owner is procuring products or services direct. In addition to that, the builder is entitled to a mortgage over the property itself to secure payment of anything that

might be owed to him, and he can put a caveat on the title to stop the property being sold without payment being made. More importantly, he can obtain a deposit from the homeowner that he can carry throughout the project, and apply towards payment of the last invoice that he gets to submit, so that the owner cannot take possession and then not pay the final invoice.

As in most standard-form building contracts, the builder is entitled to interest on overdue payments and reimbursement of legal costs incurred in chasing up those payments. He can demand additional security for payment if he has reasonable concerns about the owner’s ability to pay, and he can suspend work if that security isn’t provided. He can also suspend work if the owner is in default, and he can cancel the contract if the suspension goes on for too long. Obviously all of those remedies only apply if the money genuinely is owing, and the owner doesn’t have a valid reason not to pay.

Then there are a couple of dispute-resolution mechanisms that are designed to prevent either party from using strong-arm tactics to get what they want and avoid a fair outcome.

“First, if the amount in dispute is $10,000 or more, it must be paid into a trust account so that both parties are deprived of the money and each has an equal incentive to resolve the dispute. ”

Secondly, if there is any allegation of defective workmanship or materials, that must be resolved by a jointly-appointed independent building surveyor who must do a site inspection and interview both parties. That is to counter the common practice of one party paying a building consultant to produce a biased report without having spoken to the other party at all.

Now if you aren’t able to use a NZ Certified Builders contract for some reason, not all of those provisions are going to be in your contract. The closest equivalent are the Master Builders contracts, as you would expect from another trade association representing builders. But even those contracts lack the provision for the deposit to be carried through, the ability to demand extra security for payment, the requirement for disputed sums to be paid into trust, and the

requirement for allegations of defects to be resolved by one independent building surveyor. Also, the builder can only register a caveat or a mortgage once the owner has gone into default, which often may be too late.

The other building contracts in common use in New Zealand are produced by New Zealand Standards (“NZS”) and the New Zealand Institute of Architects (“NZIA”). Understandably they are more owner-friendly and don’t contain the same amount of protections for the builder.

Partly that is because they tend to be used in the large commercial and high-end residential projects where the builders are big enough to look after themselves. They have the cash flow and borrowing capacity to be able to afford performance bonds, payment disputes, retentions, and liquidated damages. They also have the staff and the legal fees budget to be able to review and negotiate building contract terms at the outset, accurately price their quotes and estimates, produce payment claims and payment schedules that are legally valid, and understand and comply with the procedures for claiming payments, variations, provisional sum adjustments, cost fluctuations, and extensions of time, so that they don’t get caught out. Plus they have enough experienced managers and site supervisors so that they don’t have to cross their fingers and hope that the apprentices and junior staff will carry out instructions without necessitating a whole lot of re-work.

As a small-medium builder, if you put in the effort to actually become good at all of those things, then these contracts may not necessarily be such a bad thing. You can negotiate for bonds and retentions not to apply. And if you can’t get the requirement for liquidated damages to be dropped, then at least insist that the amount is a genuine pre-estimate of what the owner would actually lose as a result of unjustified delay, and ask for evidence of that. Bear in mind that if there are no liquidated damages, the owner can still go after you for the losses caused by your unjustified delay, it is just that the owner has to prove what they were, rather than demand the agreed amount. And finally, remember that many NZS and NZIA contracts provide for an engineer or an architect to be appointed to serve as the intermediary between the owner and the builder. In situations where the owner is likely to be unreasonable, inexperienced or highly emotive, that can be of real benefit to the builder.

Geoff Hardy is a partner in the Auckland law firm Martelli McKegg and is a construction law specialist. Contact Geoff on (09) 379 0700 or geoff@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice.