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How standard-form building contracts deal with COVID-19
Sometimes, members of New Zealand Certified Builders (NZCB) are required to enter into one of the standard-form building contracts put out by Standards New Zealand (NZS) or the New Zealand Institute of Architects (NZIA). I call them “commercial” building contracts but many of them are used in residential projects as well. Many of you will be working on a project governed by one of these contracts, right now.
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In a later article I will tell you what to look out for in these contracts, but in this article, I am just focusing on how they deal with the unique challenges thrown up by the COVID-19 pandemic. There are typically three issues – Government restrictions and supply shortages are going to slow you up, some materials simply won’t be available within a reasonable time, and all this is going to cause you additional cost which you will want to pass on.
In my last article for InHouse I talked about how NZCB contracts deal with these issues. The commercial contracts deal with them slightly differently. Rather than dissect every NZS or NZIA contract I will just use NZIA SCC 2018 as an example. This is NZIA’s long-form contract where the architect has been appointed to administer the contract.
To begin with, the project commencement and completion dates are not merely the “expected” dates as they are in NZCB contracts; they are fixed dates. The builder must start work within five working days of being given possession of the site and must proceed diligently from that point onwards and complete the works within the time required by the contract. There is a “time for completion” which is a set number of weeks after the builder is given possession.
The contract goes on to say that the builder must achieve practical completion within the time stated, as adjusted for all extensions of time. The builder can apply to the architect to extend the time for practical completion due to a delay arising from any of a number of specified causes. Only three of them are directly relevant to COVID-19.
The first relevant ground for an extension is if the contract works are suspended in a way that is allowed for under the contract. Under the contract, the builder can only suspend work if the owner is late in making a payment or providing a required security to the builder and is still in default even after having been given five working days’ notice. The architect, on the other hand, can tell the builder to suspend work “if necessary”. However, this is at the architect’s discretion, and is intended to be for the benefit of the owner more than the builder. In any event, it would be difficult to argue that suspension is “necessary” unless you are actually forbidden from working on the building site. The second ground for an extension of time is that the builder has been told to carry out a variation. Doing exactly what you agreed to do, but at a slower pace because of COVID-19 requirements, would usually not be a variation. But the contract says that if the Government has passed some law, that increases the cost to the builder of performing the contract, the effect of that shall be treated as a variation. That does not necessarily mean that the builder is entitled to an extension of time – it may be that it simply entitles the builder to an extra payment – but at least there is room for argument.
The final ground for an extension of time is that “something else of significance beyond the Contractor’s control” has caused the delay. There is no doubt that a lockdown would qualify for that, and even though you can continue working under an alert level 3 or a red or orange traffic light, you have to do so a little slower than normal. So, this is the ground you rely on when applying for an extension of time.
The next issue is whether you can substitute materials that are not readily available. The starting point is that the builder has to build exactly what is described in the plans, specifications and the building consent, and any departure from that has to be with the consent of the owner and the Council. However, the owner can direct the builder to do a variation, in which case only the Council’s consent is required. The builder can ask the architect to approve a variation which is for the builder’s own convenience, but any such approval can be given on the basis that there is no time extension and no adjustment to the price.
Apart from those provisions, there is no express right to substitute materials when the originals can’t be obtained, nor is there an automatic right to a variation. There is a possibility of an extension of time on the ground that something of significance beyond the builder’s control has caused a delay, but that will depend on whether the unavailability of materials could have been anticipated and avoided by a prudent builder in advance.
Finally, can you pass on the additional costs that COVID-19 has caused you? NZIA SCC 2018 allows you to recover cost increases in a number of different ways – including variations, prime cost sums, provisional sums, contingency sums, fluctuations, and changes in circumstances. Assuming that you haven’t been told to do a variation and you haven’t allowed for COVID-related costs as a prime cost, provisional or contingency sum, then you will be focusing on fluctuations or changes in circumstances. The contract allows you to claim for “fluctuations” if you have selected that option in schedule B1. Fluctuations are increases or decreases in the price of the materials required for the project, from normal sources of supply, based on what they were five working days before the closing date for tenders. Most contracts, however, select “no” for this option.
But even if fluctuations aren’t claimable, the contract price can always be adjusted if there is a “change in the circumstances” under which the contract works are being carried out. A change in circumstances is strictly defined, and it does not include a change in the price or cost of any labour, materials or fittings. But the contract says that if the Government has passed some law, that increases the cost to the builder of performing the contract, the effect of that shall be treated as a variation. And that is what you rely on to pass on COVID-related costs.
Of course, all this is academic if, instead of being a fixed price contract, it is a cost reimbursement contract. Because in that case the owner has promised to pay whatever the project ends up costing. Under NZIA SCC 2018 you make it a cost reimbursement contract by adopting schedule B2 CRC Special Conditions – in which case you can claim all your direct costs, on-site overheads, and off-site overheads and profit.
There are only a couple of major conditions to that. First, the builder must promptly advise the owner of any significant change in direct cost estimates and the time required to achieve practical completion, and any other factor that may affect the estimated final contract price. And secondly, whenever requested the builder must provide an estimated final contract price for the whole of the works, and a comparison between the costs to date and what was estimated for that stage of completion previously.
Geoff Hardy is a partner in the Auckland law firm Martelli McKegg and is a construction law specialist. Geoff also operates the Business Related Legal helpline for NZCB members, contact Geoff on (09) 379 0700 or geoff@martellimckegg.co.nz for 20 minutes of free advice. This article is not intended to be relied upon as legal advice.
