Residential Building Contracts – What’s in Them?
Demand for housing has never been higher in New Zealand due to Covid-19 restricting travel and Kiwi expats returning home. Property developers have been working hard to supply more sections for wanting home owners as the existing housing stock runs dry. Canterbury, in particular, has faced a high demand for new builds as weary buyers avoid the risks associated with purchasing homes that went through the Canterbury Earthquakes – building new avoids the risk of inheriting unrepaired earthquake damage or a poorly repaired home. While building new is a great way to avoid these issues (and to design your dream home) it does pose other risks….
Building contracts on the face of things seem straightforward. You pay a builder a series of instalments, and, in exchange, you receive a home in accordance with the agreed plans. However, the devil is in the detail with residential building contracts. Having a solid understanding of the types of contracts available and common terms recorded is crucial before entering into one.
Generally speaking, there are three types of contracts you will come across:
1. House and Land
As the name suggests, this contract is where you purchase both the land and a dwelling from a builder. They can come in different forms and almost always include a bespoke set of terms that suit that builder. Some builders will prepare one single contract which deals with both buying the land and the construction of the dwelling (often where the builder is also the developer of the land), while others will provide you two interdependent contracts - one to purchase the land and another for the construction of the dwelling. Interdependent contracts are often used where the builder is buying from a developer and wants to on-sell the property to you on completion of the developer's subdivision. This can be helpful where you need to mortgage the land in order to pay the builder throughout the building process.
2. Full Build
This is what most people imagine when talking about building contracts. Under this contract a builder will construct a dwelling on a property you own and will generally be responsible for all matters involved. As well as building the dwelling, your builder will act as your project management and look after matters such as design and planning, obtaining Council consent and arranging compliance inspections, contract works insurance, health and safety plans and practices, supply of materials and labour, and so on.
3. Charge Up
These contracts are used where you want to engage a builder to carry out a specific task on a building project. Usually these will be chosen where you are wanting to project manage the entire building process yourself but want the help of a professional for a specific task or purpose, eg a contract just for building labour.
What each of these contracts actually entails, how it works, and what they cost ultimately, comes down to the fine print of each one. Almost all contracts are priced on a best estimate basis rather than an exact fixed sum – even where they say so on the front cover. What may seem like a solid price at the beginning can actually end up only being a best estimate. The finer details (which are often overlooked) reveal all; for example common risky terms in full build contracts include:
- Cost fluctuations: A term allowing the builder to increase the contract price where material or labour costs have increased by their suppliers, e.g. the materials supplier increases their prices or subcontractors increase their rates.
- Unforeseen ground conditions: A term allowing the builder to increase costs where the ground conditions at your property cause the builder to expend more money on their foundation design than originally priced. This ultimately comes down to who is responsible for engaging geotechnical ground investigations by an engineer, and whether those investigations are included in the contract price.
- Provisional costs/sums: The contract may contain certain elements that are only an estimated price and may be increased later if the builder faces an increased cost. Foundation works are a common element that are left as an estimate, as well as landscaping, kitchens and joinery, and appliances.
For those on a tight budget these terms pose a great risk as the cost of materials are ever increasing due to the economic pressures Covid-19 has made. However, these clauses are fairly standard across the building industry making them very difficult to remove from a building contract. It is therefore very important, you have a financial buffer before entering a building contract where these terms cannot be removed or limited in some way.
Even if these terms can be removed, your builder will be at risk of poor cash-flow should their costs increase beyond the payments they receive under the building contract. Your builder may then struggle to turn a profit and risk being wound up before your house is completed, leaving both you and the builder in a sad state of affairs. To mitigate this it is a good idea to make sure your builder is part of a franchise or association of builders that provide a guarantee for an alternate builder to step in and complete your project where your original builder cannot.
Aside from these cost increase terms, some other important matters to turn your mind to are:
- How long will the builder insure the building work for? Will you be able to obtain insurance for the dwelling once their policy ends?
- Are the plans and specifications in sufficient detail? i.e. do you know where all wall plugs, water taps, and heat pumps will be located?
- Is fencing included and the cost of a geotechnical investigation?
- Will the builder comply with the terms of any land covenant registered over the title to the land?
- What is the builder’s reputation, are they likely to go under and not complete the build if faced with an economic downturn?
- Is the builder part of a franchise that provides a backup building company to complete the build should your original builder go under?
- Does that franchise guarantee and provide long term warranties for their building work?
- How long may the builder take to complete construction? Are there penalties if it is not completed on time and how are they calculated?
- If a bank is financing your build, have they seen the contract and approved its terms, and in particular the instalment of payments?
- Who is responsible for obtaining building consent and code compliance certificates from the local Council?
- Who is responsible if further consents or amendments are needed?
- Are you able to retain a portion of the contract price as security to enforce your 12 month defects warranty provided under the Building Act?
- Will your builder cover the connection fees to data and electricity suppliers?
If you are looking at building and are after advice on the terms of your contract please get in touch with our Property and Commercial Team today.
Likewise, if you are a builder and would like help putting together or reviewing your existing terms and conditions, we can help with that too.