NZCB Building Contracts: What changes should you not agree to?

When a building contract is prepared, both parties should familiarise themselves with what it says. Some property owners do, some don’t, although it’s not the end of the world if they don’t, because in my view there is nothing in the New Zealand Certified Builders (NZCB) Building Contracts that is particularly unfair or unreasonable. However, for those that do, sometimes property owners read it themselves, sometimes they get their lawyer to do so. And some of those property owners and lawyers are relaxed about most of the terms, whereas others want to make wholesale changes.

1. Changing the expected completion date to a guaranteed completion date

In residential building projects, the law only requires you to state the “expected” completion date. That is when you reasonably anticipate you will finish. No-one has a crystal ball, and no-one can accurately predict what obstacles are going to be encountered. The contracts already require you to work diligently and conscientiously, and to finish as soon as reasonably practicable. If instead you promise to finish on a certain date, and you don’t, then you’re liable for damages. Big commercial construction companies can live with that risk; you can’t.

2. Removing any of the grounds for an extension of time

The ones that want to make wholesale changes usually justify it by saying the contract is heavily weighted in favour of the builder. But in actual fact the contract is just trying to give the builder a fighting chance. The law, at least in a residential context, is heavily weighted in favour of the homeowner. Homeowners have five different laws they can use to hold the builder to account, plus the ability to file a complaint about the Licensed Building Practitioners (LBPs) who worked on the project, to the Building Practitioners Board. That’s six overlapping rights and remedies.

But in reality, they don’t actually need any of those rights and remedies. If they are dissatisfied, what unscrupulous homeowners typically do is wait until they have possession, and then not pay the final invoice. The resulting discount off the contract price is regarded as an acceptable outcome, so they don’t have any real interest in resolving the underlying dispute. In their minds they have already resolved it, perfectly satisfactorily.

Builders are very vulnerable to that strategy. So, NZCB Building Contracts attempt to level up the playing field, by requiring the parties to act fairly and reasonably towards each other. For that reason, any change to the wording of the contract requested by a homeowner is going to dilute the builder’s protection to some extent. Many of those changes you can live with, but some provisions are fundamental and shouldn’t be tinkered with. Here’s my list of the top 12.

Even though the law only requires you to state the “expected” completion date, there’s a risk that a Judge, adjudicator, arbitrator or Disputes Tribunal Referee will hold you to that date. So, in the NZCB Building Contracts there is a list of grounds that entitle you to an automatic extension of the expected date. They are all events that frequently happen and are beyond your reasonable control. Don’t let anyone delete any of those grounds.

3. Retentions

These are very common in commercial projects. They are a percentage of your progress payments that are held back to create an incentive for you to finish the job and rectify any defects that are notified to you after practical completion. On residential projects the defects notification period is 12 months. Up to 80% of your payment claims are payable to your building materials supplier and subcontractors, and they won’t wait that long. The rest is what you pay your mortgage and feed your kids with. Large construction companies with huge cash flows and multiple projects can afford to do without that money; you can’t. But unlike them, the law already obliges residential builders to rectify defects in five different ways, so the homeowner doesn’t need retentions.

4. Applying the deposit to a progress payment earlier than the final one

Normally, you perform your building work first, and hope to be paid for it second. That leaves you defenceless against the common homeowner strategy I mentioned at the outset. There is no logical reason why it should be in that order. So NZCB Building Contracts reverse that order and require the homeowner to make a payment in advance, which the builder carries through the entire project, and credits against the final invoice. That is the builder’s greatest protection. Don’t give it away.

7.

Fixing the price by removing variations, provisional sums, and cost fluctuations

Some homeowners try to hold you to the original contract price, to the last cent. But you know there will be variations, you know that certain components of your price or estimate can’t be accurately predicted, and you know there will be increases in the cost of wages and salaries, subcontractors, and building materials. If you can’t pass those on, and you’re locked into a fixed price, the income you were counting on making from this project is going to diminish, if not evaporate. If a property owner chooses to build in the current economic climate, they should pay the true cost of that, not you. In a fixed price contract, you can build a large contingency into your price instead of passing on cost increases, but then both you and the homeowner are gambling that it won’t be under or over, and in a competitive market there is a limit to how much you can add in regardless.

8. Allowing the Owners’ Bank to dictate the terms of the building contract

5. Charging no mark-up on materials, subcontractors or labour

This is only relevant to cost and mark-up projects, or variations under fixed price contracts, which are charged for on a cost and mark-up basis. The Builder’s mark-up on materials, subcontractors and labour covers the builder’s off-site overheads and profit. The builder’s labour rates will generally cover the salaries and wages payable to staff, and on-site overheads. Often builders come under pressure to be generous, and to discount or even eliminate their mark-up. Don’t. It’s your compensation for coordinating and managing the project, doing the building work, and paying all those miscellaneous expenses of running a business.

6. Allowing the Owner to procure materials direct, but charge them through your merchant account

Homeowners sometimes reserve the right to procure certain materials direct, when they have some favourable relationship with a supplier that gives them cost savings. They don’t need your preferential trade rates as well. Materials charged to your account will be invoiced to you, and you will hope that the homeowner reimburses you. If a dispute arises, the homeowner may not. But your building materials merchant won’t have any sympathy for you. If you don’t pay them, they will put you on stop credit, and in most cases, they hold a personal guarantee from you as well.

It is the banks that are naively insisting on true fixed price contracts. Their concern, of course, is that the project budget will blow out and homeowners will get into financial difficulty, thereby jeopardising their ability to service the bank loan. But the answer isn’t to get the builder to pay the increased costs out of the builder’s own income. The answer is for the banks not to lend to homeowners who don’t have sufficient financial resources on top of their bank loan to cover any potential budget blowout.

9. Deferring the final payment until after CCC (unless you

control it 100%)

Banks are also frequently behind this common demand. But what they don’t understand is that there are two reasons why final payment should be made on practical completion and not on issue of CCC. First, a building project should be one of mutual exchange. As the building work is performed, so it should be paid for. There is no logical reason why one party should perform its part of the bargain, and then have to wait for the other party to do the same, especially when cash flow to a small building company is critical. The second reason is that the issue of the CCC is often dependent on some work the homeowner is intent on doing – paving and driveways, hard landscaping, exterior painting, etc. – so the builder might end up waiting months, if not years.