Building Contracts – what do some of these terms mean and some terms to be weary of!

May 16, 2013

Last month Sarah Wray and I had the pleasure of meeting and talking to the members of the Southern Branch of the Auckland Masterbuilders.  The meeting took place the night before Anzac day rather appropriately at the Papakura RSA.  I thought in this month’s publication I would share some of the comments I made in relation to common clauses included within some of the standard building contracts entered into by members.  For the purposes of this discussion I focus upon the Registered Master Builders Federation – Residential Building Contract as well as NZIA Standard Conditions of Contract SCC SF: 2011. 

 

  • Who are you contracting with?  Perhaps one of the most important checks to make as you contemplate executing a building contract is in relation to who you contract with.  It is important to ascertain whether you are contracting with an individual, a company or a family trust.  No matter what entity you are entering into a building contract with, you will need to ascertain whether in fact that entity has the ability to pay for the house you are building/renovating.  By way of example it would not make good business sense to enter into a $500,000 contract for a new build, if the entity you are contracting with is not the owner of the land upon which the house is to be built.  There are also various credit checks you can make of indivduals/entities, however the information you obtain from these checks is somewhat limited.  The single most important decision you make is the decision you make as to whom you will contract with.  I believe it is a decision you should agonise over, and firstly furnish yourself with the best available information to you, before making that decision.  This is more so when the building market is flat, because there are contracting parties that will take advantage of builders eager to have work on their books.  Better to be at the beach than be working for free without actually knowing it, or worse still incurring debt on labour/materials.

 

  • Monetary allowances.  These clauses typically make a distinction between estimates made on cost of carrying out particular aspects of the construction works as opposed to an estimate given in respect of the cost of materials.  Provisional Sums generally are all-inclusive (labour, materials, delivery, handling overheads, margins).  They can also apply to a separate subcontract.  Prime Cost Sums relate to the supply only of materials (delivered to the site, but not installed).  Both are adjusted against actual cost.

 

  • Cost fluctuation.  The effect of this clause allows a contract price to move in the event there is a change in cost of materials, subcontractors and services from the date of the quote being submitted.  It is an important clause to retain in your contract however it is probably one that is subject to negotiation at contracting stage.  In a flat building market, Principals may attempt to delete it from the contract. 

 

  • Mortgage for unpaid debt.  It is noted that the standard Masterbuilders conditions of contract retain an agreement by the Principal for his/her property to be mortgaged for any unpaid amounts owing pursuant to the construction contract.  This is a powerful term and one suspects is most often deleted by Principals. Its mere inclusion within any building contract would enable a builder to register a caveat against the title of the subject property, where monies are owed pursuant to the building contract.  It is a powerful tool in terms of ensuring a builder ultimately gets paid.

 

  • Dispute resolution.  It is important to note the way in which adjudications pursuant to the Construction Contracts Act 2002 operate in relation to the standard arbitration clause.  Ultimately the final decision in any dispute resolution process is left for an arbitrator to make.  An adjudication is only a mechanism to provide parties with interim relief.  A party who wins a Construction Contracts Act adjudication succeeds on an interim basis only, the final determination is made via the Arbitration process.  It is accepted though that due to economic constraints, most matters do not travel beyond the adjudication process.

 

  • Practical Completion.  Builders contracting pursuant to the NZIA standard terms and conditions need to be weary of the clauses dealing with practical completion.  It is not enough to have completed a house sufficiently in order to establish practical completion.  A builder is not deemed to have achieved practical completion until a certificate is provided in a specific form to the Architect together with all necessary information and warranties.  Since practical completion is often a trigger for payment, as well as the beginning of the Defects Liability Period, it is important that these clauses are specifically complied with by Builders.

 

The construction industry provides useful standard form contract wordings to be adopted for the specific works that you will wish to enter into.  However, entering into a contract should not equate to a builder simply signing any contract that is produced by a Principal.  Careful consideration ought to be made of the specific terms and conditions so as to ensure it is suitably tailored to the building work that it is supposed to cater for.  Better still, produce your own tailored contract for signing. 

 

 

 

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.