Message from Technical and Education Manager

Are you using the correct building contract?

Over the last two months, we have received numerous enquiries about contract selection. While Fixed Price and Cost and Mark-up are our two main contracts being used, we have also been answering questions relating to the Preliminary Services Contract and the Small Works Contract.

These two contracts are among the suite of New Zealand Certified Builders (NZCB) Building Contracts available to you and it’s really important they are used in the right situations and for the right reasons.

When to use the Preliminary Services Contract

This contract is intended for use where the builder has been asked to do preliminary work in connection with a proposed building project, either prior to the project commencing, or as part of a feasibility study to determine if the project will go ahead.

Examples of this preliminary work are: • Demolition work • Site clearance work • Site and soil testing e.g., Geothermal testing • Planning and designing. Why do you need to be careful with this kind of work? Clients may ask you to work for free and offer the main contract in return. But, during that time they might engage other builders and get a cheaper price. If they end up going elsewhere, you’re out of pocket for the preliminary work you did for goodwill. The Preliminary Services Contract ensures you get paid for the work you are engaged to do. NZCB’s Preliminary Services Contract creator Geoff Hardy (Partner at Martelli McKegg Lawyers and construction law specialist) even goes one step further with the contract by asking the client to identify who will be doing the main contract. While this has no legal power behind it, it will help you weed out any “tyre kickers”.

Some smart NZCB members use the Preliminary Services contract when pricing a job to save time and money. You need to ensure you get paid for the work you do because building that cost into the main contract, only to be unsuccessful, means it’s a loss to you and your business. Don’t be used as a price comparison; use a Preliminary Services Contract to ensure you get paid for pricing work.

When to use the Small Works Contract

This contract is intended for use where the building work is expected to be either no more than $30,000 or of such short duration that the builder will only need to invoice the owner once. The builder has the option to select whether the works will be charge up or a fixed quote.

This contract has been a hot topic because many members are opting to use this contract for jobs up to $400,000 instead of a Fixed Price or Cost and Mark-up contract.

According to Geoff Hardy, this can leave a builder very exposed. “I appreciate many builders don’t like a lot of printed material and/or they think their clients are going to be put off by a bigger contract. Or maybe the builder is being cunning and using the Small Works Contract knowing their clients are unlikely to get it checked out. But it is a dumb strategy. It is a common misconception that small and simple is good. Small and simple simply means less protection for the builder and less certainty when a difficult issue arises. The more words, the better.”

Here is a list of provisions covered by the full contracts. These are either not covered by the Small Works Contract or not covered as comprehensively. • Cost fluctuations • Possession of the site • Ownership of the intellectual property in builder-supplied plans • Comprehensive cancellation clauses • Force majeure • Disputed sums to be paid into escrow • An agreement to mortgage allowing the builder to caveat the title • Process for resolving disputes over alleged defects • Protection for the builder against the owner reducing the scope and then giving that work to a substitute builder. As you can see, the builder is exposing themselves to numerous risks if a project goes pear-shaped with a client.

I hope this gives you more clarity as to when to use these two contracts to ensure you’re not leaving yourself open. If you are unsure which contract is best for your situation, please give us a call at National Support Office – 0800 237 843.

Ka kite till next time!