BUILDING A HOME. Just like the boy scouts – be prepared. By Atticus Legal, Hamilton, Building contract specialists
Building a home is an exciting project. It can also be quite daunting. There can be problems, especially delays, defects and sometimes an unexpected blow-out in the cost (even in the case of so-called ‘fixed price’ building contracts). But research, awareness and careful oversight can reduce those risks. Read on for useful information and helpful tips when building a home.
Atticus Legal has a separate article dealing with ‘land and home packages’ on our website. Some of the below considerations also apply to a land and home package situation. That other article is at https://atticuslegal.co.nz/land-and-home-package/
Building a home – The things you need to know
When building a home good legal advice is crucial to maximise your rights and remedies, especially at contract stage and/or if there is a delay or default by the builder. At Atticus Legal, we frequently advise clients on building contracts. We know them inside-out.
The Building Amendment Act 2013 introduced various additions to the obligations of builders under residential building contracts and strengthened consumer protection. But the basic steps consumers can take to protect their own interests, and to minimise the risks of the above-mentioned problems, remain the same.
Often the building contract itself is the last thing the builder will present to you for signing before building starts. You will probably have already invested alot of time and energy in discussions with the builder prior to this so you may feel you’re already ‘committed’ to the process. Don’t assume that the building contract is fair or even-handed. You really should take advice on it before signing. I suggest you also consider why the Master Builders and Certified Builders organisations don’t publish their ‘standard’ building contracts on their websites – it’s not because they are inherently fair!
Research – Do your homework before you sign the building contract
As with any major undertaking, when building a home you should do some homework first. Remember that you will likely contract with a building company to build your home, not the builder or building-company owner personally.
First, to the extent you can, research the building company you propose to engage. The inquiries we recommend may sound a little ‘over the top’ but they can potentially save your bacon. Search the company at the Companies Office website – it’s free. How long has it been operating? And search the directors and shareholders as well. Have they been involved in earlier companies that were liquidated? If you want to dig deeper, check out their credit history through someone like Veda or Centrix.
If your building company were to go into liquidation during the build that would be a major problem for you. And that happens more than you might think. Building companies sometimes spread themselves too thin over a number of projects, causing cash flow problems and sometimes liquidation. Stonewood Homes Hamilton, Concept Homes Tokoroa and Starplus Homes Ltd (all in liquidation) are recent examples of this in the Waikato.
Also, obviously ‘google it’ for any comments/reviews by others. Ask around about the quality of the work they do and their timeliness. Do they have a good reputation among consumers who have actually engaged them? Ask the building company for names and contact details of any customers willing to give a referral. If they won’t give you this information for ‘privacy’ reasons, have you seen the builder’s signs on completed homes? Why not knock on the door and ask the occupant? Oh and call me cynical, but my radar tends to go up when the Privacy Act is quoted at me.
Remember that the large national building organisations are often made up of franchised territories, with different companies operating in each territory. That is, you may not be dealing with a company as large or substantial as you think. Having said that, dealing with a franchise territory owner can be an advantage as compared to a similar sized non-franchise company. If the territory franchise operator defaults (eg. becomes insolvent or the build suffers lengthy delays), the franchisor may be willing to step in to help. They won’t be legally obliged to do so, but may see it as appropriate to preserve the franchise reputation and brand. But there’s a limit to what, if anything, a franchisor may be prepared to do.
Master Build Guarantee & other Guarantees
A Master Build Guarantee is often highly regarded by customers building a home. It is only available if the builder is a registered master builder and only if the Master Build Guarantee application is completed (and the application fee paid) before the build starts. In my opinion a Master Build Guarantee is not all it is cracked up to be, but it is probably better to have it than not.
Clients have found that the ‘cover’ is not as extensive as they thought and there are a number of conditions and limitations on the policy. In the case of ‘labour only’ building contracts, it won’t cover defects in materials. And it’s not cheap. Make sure you are clear with your builder (and incorporate into your contract) who will complete the Master Build Guarantee application and pay the fee.
Note that there are different levels of cover under the Master Build Guarantee. You should look at their website and confirm with your builder which level of cover you want.
A couple of other things to be aware of with the Master Build Guarantee, as well as some other types of written ‘guarantee’ supplied by non-master builders. First, they have a time limit on them, say 2 to 10 years. Second, if it is not supported by insurance (as is the Master Build Guarantee) then it is a ‘paper promise’ from the company only, not the builder or director personally.
Also, they are often not automatically transferable to a new owner when you sell the property. The Master Build Guarantee requires an application for transfer and payment of a transfer fee. If it is not transferred in accordance with the Master Build requirements the new owner will not be able to claim on it.
Building a Home – Important terms of the building contract
The building contact should attach detailed plans and specifications, as they represent the specifics of the build you are entitled to expect. From the number and placement of power outlets in each room to the interior and exterior materials and finish (eg. undercoat and two top-coats?), the devil is in the detail. A vague arrangement for materials and finish the same as a completed dwelling you have been shown, without detailed plans and specs attached to your contract, is not enough. And make sure all contract attachments are initialled by all parties.
People often rely on the judgement of their builder when building a home, but you should still do some homework. If you are offered ‘off-the-shelf’ plans and specs ask to see a house that house been built using those plans and specs.
Building contracts require progress payments. They are supposed to match the value of the construction stages, although often the first payment will effectively be an ‘up-front’ payment for design works, building consent fee, ‘preliminary and general’ and site works. Other than that, try to gauge whether the progress payments required in the building contract you are presented with roughly match ‘progress’ value/cost. Ask them to be amended, before signing, if they look over-blown. Otherwise you may effectively become an unsecured creditor of the building company if, for whatever reason, work stops, leaving you having effectively paid for materials/works that have not yet been done. If you have to go to another builder to complete, you will be paying twice.
The total building cost (even sometimes on a so-called ‘fixed price’ contract) may be subject to variations and ‘extras’. If it isn’t a fixed price contract the builder will be able to pass on cost increases relating to extra work required by the council as a condition of a building consent (eg. unanticipated extensive foundation works) and increases in the cost of labour and materials. Even a fixed price contract will allow a price increase for any variations or extras you request (ie. something not in the plans and specs).
Prime cost sums and provisional sums
There is often confusion with ‘prime cost sums’ (‘PC sums’) and ‘provisional sums’. Fluctuations in these can significantly affect the final build cost. A prime cost sum is an amount or budget included in the build cost as an estimate for purchase of specified items (eg. tapware or bathroom fittings). A prime cost sum will often only allow for standard ‘no frills’ fittings. But if products selected by the client at a later stage prove to be more expensive than the budgeted pc sum then it is an ‘addition’ and is added to the total build price. If a pc sum looks too cheap then, before signing the contract, you should do some pricing research to avoid later surprises. Human nature being what it is, builders are sometimes inclined to give low estimates, even for what may be a significant part of the build, to try to make the build price in the contract more attractive. But if that has occurred the actual price may later come as a rude surprise to the customer, especially if they are already borrowing to their maximum capacity. Another way to minimise pc sum surprises is to make the specs as specific as possible as to type, brand colour, etc to reduce the scope of what the pc sum (budget) actually covers.
A provisional sum is an amount specified in the contract as an estimate for certain work or materials, the exact price of which can not be determined at the time of contract – eg. a provisional sum for foundations and site works. But, for example, unforeseen soil conditions may lead to the provisional sum being exceeded. If it is specified as a provisional sum the builder can pass on these extra costs to the client.
Building a home – Time frame for completion
A building contract will often contain a promise to complete the build (once started) within an unspecified reasonable time. And if it contains a promise to complete within a stated period (eg. 30 or 40 weeks) that period will often be stated to run only from when the builder gets the building consent or from when they commence construction (not from date of signing of the contract). But of course those factors (obtaining building consent and construction commencement) are in the control of the builder. So the builder has quite alot of ‘wiggle room’.
Delays in building a home (and I don’t mean caused by weather) are quite common. As noted above, builders can spread themselves too thin. I’ve had clients waiting 18 months or more for completion. What to do?
We recommend that you insist on including an effective time-frame obligation for completion in the building contract (or the land and home package contract, as the case may be). We suggest you choose a ‘generous’ time period (say, 9 – 11 months from date of contract) so the builder is more likely to be comfortable including it in the contract. And make sure it starts from the contract date.
Also, make it a condition of the contract (called a ‘sunset clause’) rather than a promise or ‘warranty’ by the builder. Ultimately this may enable you to cancel the contract if it is breached. But to preserve this cancellation right you have to be careful what you do or say during the build so that you do not effectively waive the condition (eg. by making a progress payment after the condition date has expired). If there is a lengthy delay you should consult Atticus Legal for advice on your rights and remedies.
And to give it further teeth we recommend that you insist on a ‘liquidated damages’ clause being inserted in the contract before you sign. This clause provides that for every week of delay in completion (and issue of a code compliance certificate) beyond the condition due date the builder must compensate you (by deduction from the remaining build price) a fixed amount to cover your loss/expense. For example, a weekly liquidated damages sum might be say, $450 to cover your weekly rent while you continue to wait. Note that a liquidated damages sum must, in order to be enforceable, be a reasonable estimate of your ‘loss’ arising from the breach. It can not be an unjustifiable inflated amount (eg. $500 per day) which would represent a ‘penalty’ and be unenforceable (and not worth the paper it’s written on).
Other important aspects when building a home
- If the builder has made a particular promise you should ensure it is written into the contract. Verbal promises can be very difficult to prove months later.
- If there are any variations or extras you should insist on agreeing in writing the cost of it (and any related time-extension for completion) at that time. Builders will often suggest “we’ll deal with it later in the final payment”. By then, the build has been completed and you are champing at the bit to get into the house. When faced with a real surprise as to how much the builder wants for the variation or extra, the pressure is on you to pay, otherwise you won’t get possession. If it is an unexpectedly expensive item you might not have been prepared to proceed with it if you’d known the cost before-hand.
- Ensure the contract includes a ‘defects maintenance period’ of at least 90 days, requiring the builder to promptly remedy any problems with materials/workmanship that become apparent during that period. In addition, to give this some teeth, you should have the contract provide for a retention from the final instalment of say, 5% of the contract price until all defects are remedied within the defects maintenance period. The Building Act now provides for an automatic 12 month defects liability period. The above 90 day maintenance period in the contract will not reduce the implied statutory period. But the above-mentioned retention will at least motivate the builder to make the necessary repairs during the 90 day maintenance period.
- Consider getting a soil report on the proposed building site before signing the building contract (if a site-specific soli report is not available on council records from the subdivider). Soil conditions can make a big difference to the cost and extent of the foundation works required, which are usually a provisional sum – see above.
- It is important that the building works be insured during construction – called a ‘builder’s all-risks’ or ‘contract works’ policy. If you are borrowing from a bank for the build your bank will require evidence of such insurance. Before you sign the building contract, ensure it makes clear who is to arrange and pay for this insurance – you or the builder? And of course when you take possession you will need to have your own homeowner’s insurance in place.
- If you are relying on bank borrowing, then before signing the building contract you should ensure you have a written finance offer from your bank for sufficient to complete the build and perhaps also a safety margin for variations and extras. You need to be sure that you can satisfy all the conditions of that loan offer. For xample, sometimes the bank requires a forecast valuation on an as-completed basis. Your bank may also require written cost-to-complete estimates from a quantity surveyor for progress payments.
- Make sure that your final payment to the builder is not due until both ‘practical completion’ has been achieved and a final code compliance certificate has been issued by the council. If you don’t have a code compliance certificate this will cause a problem with your insurance (and your bank).
- Be aware that the contract will provide that ‘practical completion’ does not include ‘minor’ matters. A code compliance certificate may issue without those ‘minor’ matters being attended – eg. lawn and garden works, clothesline, letterbox, etc. These may not be completed by the time final payment becomes due. Another good reason for including in the contract a retention during the maintenance period.
There’s a lot to digest when building a home. If you take our above advice you will at least protect your interests as much as possible. And hey, homes get built every day. We hope you enjoy your new home!
WANT TO KNOW MORE ABOUT BUILDING A HOME? Just Ask Atticus Legal, Property Lawyers Hamilton NZ, Business Lawyers Hamilton NZ
CALL ANDREW SMITH, the owner of Atticus Legal, for expert professional advice on any of the matters referred to in this information sheet.
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Disclaimer: The information contained in this information sheet is, of necessity, of a general nature only. It should not be relied upon without appropriate legal advice specific to your particular circumstances.
This information sheet is copyright © Atticus Legal, July 2016.