Don’t get burned by your residential building contract

Property

So you have decided to build a new home or investment property through a building company, but how do you ensure building your dream home doesn't turn into a nightmare?

A residential building contract is probably one of the biggest contracts a person will enter into during their lifetime; however a number of people will not read it before they sign. Even a ‘standard’ building contract is generally weighted in favour of the builder and may include some terms which will surprise home owners. Here are a few important points to cover when looking at your building contract:

Who are you contracting with?

It can be difficult to tell the good from the cowboys especially when you are getting the sales pitch. Your best bet is to do some homework. This may include obtaining independent references from previous clients, looking online for good/bad press (including blog sites etc.), and your impression of the building company’s service so far. From the beginning you should get to know the person who will be your point of contact during the build, make sure they are professional, upfront and reliable.

Timeframes:

Most standard residential building contracts do not specify a timeframe for a) starting the build once the agreement is signed, or b) finishing the building after construction has started. Most contracts will provide notional and ambiguous obligations using phrases such as “with reasonable diligence” or “within a reasonable time.” The contract will also provide allowances for matters outside the builders control such “inclement weather.” You should always ask your builder how long it will take to complete the build and try to negotiate with the builder to include a specific timeframe in the contract, (i.e. 6 months from the issue of building consent). There should also be set a penalty for not meeting the deadline, such as $~ per week for your accommodation or mortgage expenses. However, you should be weary of setting the timeframe too tight, a builder working under too much pressure may make mistakes or take shortcuts.

Payments:

Most contracts will provide planned payments at designated stages of the build. You should always check that the amounts required up front and during the initial stages of the build seem reasonable and are reasonably equivalent to the payments for the final stages of the build. Paying too much money in advance can leave you in a very difficult situation if the builder goes under during construction. Remember you should never pay large amounts on a building contract if you do not own the land on which the house is being built. With house and land packages you should only pay a small deposit (around 10%) with the remaining funds being paid when you get the title of the property and following issue of the code compliance certificate.

You should be aware that most building contracts include penalty interest for late payment. If you are relying on lending from a bank to fund all or part of a build then you need to ensure you have written confirmation from the bank that they will contribute to payments when required under the building contract.

Price Increases:

The price on the front of the agreement is almost never the fixed price of the building contract. Almost all building contracts contain terms which allow for variations to the building price.  The normal instances when the builder can increase the building price are:

a. unforeseen ground conditions requiring additional excavations, and/or enhanced foundations;

b. changes to the plans and specifications required due to obtain Local Authority (Council) consent; and

c. increase in the costs of materials and labour following signing of the building contract.

You may be able to negotiate for some or all of these terms to be removed from the contract or to have the increases capped (i.e. 5% of total build price). However, most builders will be unlikely to agree to and it may end up being an unavoidable risk that you need to account for.

Warranties and Guarantees: 

A residential building contract may or may not provide specific warranties from the builder. The Building Act 2004 and related legislation create implied warranties and offer some protection in relation to the quality of building works delivered by a builder. There are also statutory guarantees in the Consumer Guarantees Act 1993 that may apply for residential construction contracts. Many building firms will also offer private guarantees (such as master builder) for an extra cost. These guarantees will be provided in a separate document than the building contract and you should ensure this is signed prior to, or at the same time you enter the building contract (especially if there is deposit protection). The level of cover under the guarantees vary so you should also read the particulars of the guarantee and the applicable limits to compensation. 

Plans and specifications:

The plans and specifications in final form should always be printed and attached to the building agreement. You should check these plans and specifications carefully to ensure they are 100% accurate in terms of your instructions or expectations. If there is a dispute with the builder then it is these plans and specifications which will be used to determine the dispute.

There are inherent and avoidable risks involved with building, but understanding and managing these risks by addressing them in your building contract should allow you some peace of mind, especially if everything doesn’t go according to plan. Remember you should never rely on verbal statements made by the builder over the specifics of the contract. If the builder is willing to tell you something they should match this in the terms of the contract they are asking you to sign.

Disclaimer: The content of this article is general in nature and is not intended as a substitute for specific professional advice on any matter and should not be relied on for that purpose.

If you would like further advice regarding building contracts, please contact our Property Team who will be more than happy to assist you.

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Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.