Kiwis are considering now more than ever whether this is the time to build, sparked by competitiveness in the auction room and rising house prices.
For many, a residential building contract will be the most extensive and complex contract they will sign. We recommend obtaining legal advice before entering into such a contract, however here are a few important things to make particular note of.
1. Fixed price?
One of the inherent difficulties with building contracts is that the contract price is seldom fixed, even in a ‘fixed price’ contract. A number of mechanisms may increase the contract price such as PC sums, variations and cost fluctuation clauses.
Provisional sums/prime cost sums (PC sums) are terms that are often used interchangeably but generally refer to sums where the price of materials or the amount of work required is unknown and will be quantified later. The larger the number of PC sums in a contract the greater discrepancy there will likely be between the contract price and final cost of the build.
Variations are those requested by the customer during the build where the builder will follow a specified procedure for costing and approval. While variations are common, they can quickly see the price of the build rise, showing the importance of being satisfied with the plans and specifications prior to signing. Any variation should be agreed in writing.
Cost fluctuation clauses allow builders to pass on unforeseen cost increases. These clauses will be more prevalent than ever with ongoing supply issues due to the pandemic.
2. Payment
Contracts often provide for the contract price to be paid in staged payments. It’s important to check the payment percentages are in line with the proportion of work actually done – i.e. you haven’t paid for 50% of the contract price with only 20% of the work done.
We also recommend checking the deposit amount is reasonable and the timeframes for making payments are not unreasonably short. Some banks will now only make payments for work completed and not in advance of each stage.
3. Completion
Often the final staged payment will become payable on practical completion. It is preferable that the final payment is payable on provision of a code of compliance certificate.
Although possible by following stringent requirements under the Building Act 2004, we advise against taking possession prior to issue of a code of compliance certificate.
The above highlights just a few of many considerations when entering into these contracts. We recommend obtaining specialist legal advice prior to signing on the dotted line.
Contact Ari on DDI 371 1024