Hybrid contracts

With the current climate of supply chain constraints and price increases our industry is facing, it makes it very tricky to accurately price up a job, especially with the goal posts constantly changing. So, as a builder/ business owner, how can you reduce the risk of protecting yourself and your business when you are having to deal with the unknown?

I have fielded member enquiries seeking advice on whether we have a hybrid contract, or whether one of the New Zealand Certified Builders (NZCB) suite of Building Contracts can be transformed into a hybrid contract.

Just to make it clear what the hybrid element of the contract is that I am referring to... it’s when you are wanting to fix the price of some elements or items of the building work, and cost reimburse (charge out) other elements or items of the building work. A basic example is fixing the price on some of the big-ticket items like the slab, roof, joinery and cost reimbursing the rest of the work, labour included.

So… can this be done? I put the question to Geoff Hardy (NZCB Legal Advisor, Construction Law expert and author of the NZCB suite of Building Contracts) to make comment on if this can be done. His response was “yes, it can, no problem.” The contract to use would be the Fixed Price+ Contract as it is in fact already a hybrid contract. That is because there are three ways you can charge for your work or materials on a charge-up basis, and they are:

1. Variations – always charged on a charge-up basis, but they must be genuine variations, not just price rises. i. When applying a variation to the contract, where you can ensure to confirm the additional cost to the client and have them approve in writing or have them sign a variation notice confirming their acceptance of said variation.

2. Provisional sums – you estimate the cost and then you replace it with the actual cost once it is known. i. Again, this revised cost needs to be captured, so we will need to follow the Variation process and have the client accept in writing the revised Provisional Sum. 3. Cost fluctuations – if your suppliers and subcontractors end up charging you more than they estimated at the outset, you charge the actual cost not the estimated cost. i. Just like the previous two options this is also treated as a variation to the contract, so we will need to confirm revised cost to the client and have them approve in writing a variation notice. We need to be very mindful of ensuring we keep ourselves safe during these difficult times, so that requires putting your business hat on and, where applicable, not continuing with variation work until you have this variation confirmed by the client in writing. Clients generally will challenge price increases when a variation in a progress payment claim is presented to them down the line, so having that confirmed in writing and attaching it to the payment claim that makes reference to the variation will reduce any push back or challenge from the client.

Geoff also goes on to state in these times of materials shortages, supply delays and rapidly escalating costs, that he encourages members to make much greater use of provisional sums and the special COVID-19 clauses he has written for NZCB, to assist our members in protecting themselves. If you are unaware of where to access this COVID-19 clause, jump into the NZCB members’ only Toolshed and under building contracts you will see the button to download the COVID-19 Contract Clause Addendum pdf: https://www.nzcb.nz/members/building-contracts/

Attach that to every building contract you present to clients, to explain how the NZCB Building Contracts will respond to price increases and supply delays.

We need to be very mindful of ensuring we keep ourselves safe during these difficult times, so that requires putting your business hat on...

If you have any further queries on this matter or building contracts in general, please don’t hesitate to ask, either send me an email, shane@nzcb.nz or contact me on 0800 237 843 extension 7220.

Ka Kite till next time, keep safe everyone and hopefully see you at the NZCB Halo 10-Year Residential Guarantee Workshops – see page 9 of this issue of InHouse for more information.