Building Contracts: Some key considerations
As more Kiwis return home a lot of us are looking to build or renovate our houses. Many are also looking at or entering into the property development market and building spec houses to generate income. These undertakings will require entry into a building contract. Given the recent experiences with price increases for building materials, scarcity and delays in the supply of materials and increased labour costs, these building contracts will likely involve significant amounts of money and time to be invested.
Unfortunately, we are coming across issues as above more and more so it is crucial that you understand the terms of any building contract and the risks you may be exposed to prior to signing.
In this article, we discuss some of the issues that we look at when reviewing a building contract. This is not intended to be a checklist and you should not consider this a substitute for obtaining legal advice specific to your building contract as they are all different. The intent of this article is to provide comment for consideration so that you will be more informed on the importance of obtaining legal advice.
Some key considerations:
- Do your due diligence on the builder and his/her prior work. We can’t emphasize this enough if you can obtain references from other clients on previous work performed by the builder then you should do so. You could also check Google reviews to see what others have said.
- Your builder may operate via a limited liability company. If so, although an awkward conversation to have, you could ask the builder to provide evidence of the company’s solvency. The last thing you want is to have a dispute with a builder who is insolvent! It can be very difficult to obtain a remedy from a company which is insolvent. If your builder intends on using subcontractors, it would also be advisable to ask for information about those subcontractors and their experience.
- It is essential you understand how the building contract is priced. Due to the continuous rises (almost monthly at the moment) for building materials, fixed price contracts are becoming less common and builders may be able to pass those increases on to you. If you are borrowing from a bank to fund the build, many lenders will only approve up to the initial contract price so any increases above this may require a fresh lending application and new valuations to be obtained. In worst case scenarios, requests for additional borrowing may be declined.
- Pay attention to when payments are required and ensure you pay on time. Often builders have multiple builds underway at the same time so delays in receiving payments due could mean your builder will move on to the next project until they’ve been paid (among taking other actions); if they move on to the next project this translates to a longer build time at your end and those delays will usually have a cost attached to them.
Some questions to ask/consider:
- Can the builder add a margin on the materials and labour being provided under the building contract? If so, how much?
- In what circumstances can the builder suspend works? Normally this will be where a payment is not made on time by you, however there may be other situations.
- What rights does your builder have to vary the plans and the materials used? Do they need to obtain your consent before doing so? g. what happens if the materials specified are not available to purchase.
- Who is responsible for obtaining the Building Consent, Resource Consent and Code Compliance Certificate? Are these costs included in your building contract or do you need to pay directly to your Local Authority?
- What insurance is the builder taking out to protect your home? If you are borrowing funds from a bank you will need to obtain evidence that insurance has been taken out. Even if you are not borrowing, you still need to know that the project is covered by insurance to protect your asset while it is under construction.
- Often building contracts exclude liability for ground conditions and any land subsidence, inadequate earth fill and unforeseen physical conditions under the surface. You can take steps to best ensure your site is adequate to build on or minimize risk at least.
- You need to understand what the process is if you request a variation to the building contract and how the builder will price the requested variation. This is an area that clients often get caught out on as variations can be costly to implement.
- When is the builder entitled to a price adjustment? Normally this would be for a substitution of materials if the original specified materials are not available however, there may be other circumstances that the builder is able to increase the price.
- The building contract should provide an expected completion date. The contract will normally state that the builder is not liable for delays caused by you not meeting your obligations under the building contract or any variations to the work, Council requirements or Covid-19 lockdowns. Delays can be costly! You may find yourself renting while also servicing the mortgage you have drawn down to complete the project, so it is important you have clear guidelines on when the work will be completed.
- Most builders are resistant to including a clause that states if there are delays (not of your making) then there is a weekly penalty payment made by price reduction to the build price. If you are able to include a clause along these lines it can minimize your weekly outgoings and incentivize the builder to complete the project on time.
- You need to be aware of the defects warranty period and notify your builder of any defects as soon as you become aware of them. Defects should not cost you anything however, there is normally a timeframe placed on defects that varies between 30 – 90 days.
Hopefully, this article demonstrates how important it is to carefully review your building contract. There is a lot to be aware of. As building contracts involve significant financial liability we’re of the view that obtaining legal advice is a comparatively small cost when you consider the overall cost of the project.
If you would like to discuss your building contract, please use our free 30-minute consultation and book a time or email help@corelegal.co.nz to be directed to one of our team to discuss.
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