Contracts: do things by the book

Kia ora New Zealand Certified Builders (NZCB) whanau, as I begin this article, I am mindful of becoming a broken record, but I am experiencing an increasingly high number of members seriously exposing themselves when they have been engaged to do building work for clients.

The most common contract-related shortfalls include members:

• Conducting work over $30,000 without a building contract. In some cases, the work is over $500,000.

• Trying to implement a NZCB Fixed Price+ Contract like a Cost and Mark-up contract.

• Not invoicing or serving payment claims properly resulting in the builder not being paid.

• Continuing work while having outstanding unpaid invoices.

• Striking out numerous terms and conditions from the NZCB contract through lack of understanding of the risk this exposes to them and their business.

• Adding variations to the cost of the job without having it approved by the client in writing.

• Not taking a deposit or taking a deposit and using it during the build.

• Using a NZCB Fixed Price + Contract to meet the bank requirements, then drawing up a second contract (Cost and Mark-up) to facilitate the build.

What are the alternative solutions to the above shortfalls?

• For building work to the value of $30,000+, the Building Act requires you to provide a building contract to the client. Don’t forget the prescribed documentation (Client Checklist, Disclosure Statement). Best practice is to use a building contract regardless of whether the work is over or under the $30,000 threshold.

• Both parties must sign the building contract for the agreement to be in place. If there is no contract signed, both parties default to the Government contract terms and conditions (a safeguard), which are not builder friendly.

• It is very important to take a deposit upfront and implement the deposit how the building contract stipulates, i.e., the deposit should sit untouched for the duration of the contract until you reach the Final Payment Claim, where you will write it off against that final payment claim amount e.g., Final Payment Claim = $90,000 – Deposit $50,000 = $40,000 outstanding.

• The deposit can either be in the builders bank untouched or in an escrow account untouched. Putting it into an Escrow account where both parties can access it may assist with the bank’s requirements of loss of deposit cover and non-completion cover. It can be viewed as protection for both parties; if the builder is liquidated, the client can access the deposit to pay any outstanding subbies/suppliers who are owed money. On the flipside, if the homeowner runs out of money, the builder can access it to pay any subbies/ suppliers owed.

• Key thing to remember when using a NZCB Fixed Price+ Contract . The price you have given to undertake the work is a fixed price, not an estimate. The + sign refers to any additional cost either through additional work added to the original scope, price increases through the Cost Fluctuation Clause, and through Provisional Sums for line items which when priced later are more than what was allowed for. All these must be treated as a Variation and captured as a Variation.

• If you don’t invoice or are not serving payment claims and you start to experience delays in paying or non-payments, then you will need to start serving payment claims. If this doesn’t motivate a client to pay, then you need to start exercising the terms and conditions of the contract. My recommendation is to address the situation immediately using the terms and conditions of the building contract to assist you, so you don’t get too far into the next stages of work when you haven’t been paid for the previous.

• Do not strike out terms and conditions of the NZCB contract before seeking legal advice on the risk involved in doing so. Call Geoff Hardy, Martelli McKegg Lawyers (NZCB Building Contracts creator and NZCB Association Construction Lawyer) on 09 379 0700 to discuss your situation because he may have alternative options.

• Use one contract and one contract only for the work you have been engaged to do. Trying to mislead the banks in an effort to have lending approved will quickly come back to bite you. Especially when you are submitting payment claims and they are not marrying up with the original payment claim schedule for the bank to release the money for payment.

Or if you end up in court over a payment dispute… which contract will you take? Do the right thing and be fully transparent. Work with the banks to meet their needs and provide alternative solutions if necessary.

It isn’t getting any easier when banks are involved. In fact, banks are becoming more and more demanding. It is my opinion that banks are very much misinformed on the building process and are just undertaking a checklist process to minimise their risk. It is up to us as an industry to provide as much information to the banks as possible so they can make an informed decision in you and your clients’ favour. I feel NZCB National Support Office can and need to do a lot more in the banking industry to put our members in a better qualified position of understanding with banks, and it is something I have and will bring to NZCB Chief Executive Malcolm Fleming and the NZCB Board’s attention.

Lastly, I would like to bring to your attention that the consumer engages you, the builder, for your professional services – you’re not engaging them to do their work. So, remember that when you are dealing with a challenging client who is asking to change the conditions of the contract. They have engaged you for your professional services, so they need to accept your terms and conditions, not the other way around.

In need of assistance? Call myself or the team at the National Support Office on 0800 237 843.

Nga mihi.

Shane Ririnui NZCB Education and Technical Manager