Reno expert Jen Jones talks through what to look for in your builder’s contract
Do you know that it’s a legal requirement to have a written contract with your builder if the scope of the project is more than $30,000? Whether your preferred builder submits a bespoke contract or one from the likes of Master Builders or New Zealand Certified Builders, I generally don’t recommend you accept the first cut of it. Here’s why.
Default contracts
The standard contracts in the industry favour tradies more than homeowners. I’m a strong advocate for a fair and balanced contract, as that way the builder is incentivised to do a good job, keeping the homeowner happy, but the builder is also still protected if the homeowner doesn’t pay their invoices or things change.
Their livelihood is protected as well as your biggest asset. Win-win.
Contract Formats
There are a few different formats, and usually builders have their preferred way to do business.
Fixed-price lump sum
This is when a fixed price is quoted for your entire project based on the documentation you supply to the builder, such as drawings, schedules and a scope of work. The builder cannot theoretically charge extra costs unless there is a scope change. Homeowners often see this as favourable, and you can be forgiven for assuming it’s risk-free. The issue with fixed pricing is that it’s only fixed for a fixed scope, not the whole project. Missed scope in the drawings or misinterpreted details can cause blowouts, especially if you’re inexperienced with critiquing pricing and identifying what may have been overlooked or excluded. There’s often a clause in these contracts about price increases being passed on, so it’s not really fixed after all.
Labour and materials
Also known as ‘time and materials’, this is where you agree to the builder’s labour rates, either hourly rates depending on experience and level of qualification, or day rates, and the builder invoices you for actual hours worked, plus the cost of materials. This is a common approach when the scope isn’t clearly defined, and also for smaller, lower-risk jobs.
The important thing to realise is that ‘materials’ is not just materials, it’s anything that isn’t labour. That includes direct and indirect costs, overheads and a margin.
Price or scope caps are a sensible way to limit the risk of overruns, and good communication is key.
Cost-plus or cost-reimbursable
With this form of contract, you agree to cover the actual expenses of a project, such as labour and materials, as well as a fee that covers the builder’s overhead and margin. This is easily the most transparent form of contract but it comes with risks, as nothing is fixed upfront and even if an estimate was produced prior to contract execution, it might not be that thorough or comprehensive.
So which is best?
I tend to go for a hybrid contract, which is not unusual, and a combination of fixed and cost-plus. Anything that can be ordered at contract execution – such as framing timber, prefabricated trusses, and some fixtures and finishes – can have its price fixed because it’ll be locked in when the order is placed. For everything else, PC (prime cost) or provisional sums at agreed rates will help to provide an indicative cost for the overall project (plus contingency, of course), but with actual costs charged on a cost-plus basis for the agreed scope. ‘Agreed’ is the operative word, as variations are still variations.
A PC what?
‘Provisional sums’ and ‘PC’ are jargon you’ll want to be across at the pricing and contract phases.
A PC sum is a prime-cost sum. This is used for scope that you know will be included but hasn’t been defined at the time of executing the contract. It’s usually a square metre rate, for example, an allowance of $80 per square metre for a flooring product you haven’t yet chosen.
A provisional sum is for something you know will come up on site, but can’t be fully scoped until you’re underway. It’s usually a lump sum. For example, you might know your plumbing needs to be replaced but can’t fully assess to what extent until after demolition, so you allow $5000 for it.
Finally, a contingency is for everything else – the unknowns. The risks you haven’t identified, surprises, changed minds, scope creep, procurement issues and delays.
Four things to look for in a contract
Money
What deposit is required and what’s the payment schedule?
Expect to pay around a 10 percent deposit for your project, based on the contract sum (which might include PC and provisional sums). This helps to lock in the builder, and also the timeline, as it enables them to place orders for the materials they will need at inception/after demo, and the lead time for those will dictate your overall timeline – that and any longer lead time items like cladding, fixtures and fittings.
A payment schedule is the agreed payment structure beyond the deposit.
For example, will you be invoiced weekly, fortnightly or monthly? Are there fixed payments or progress payments? The Construction Contracts Act 2002 default is progress claims, and there’s a specific process for how these claims are submitted, approved and paid, which your builder is obligated to inform you of.
Scope
What’s appended to the contract and how are variations and change orders dealt with?
How is the agreed scope that’s referenced throughout the contract/pricing actually defined? Is it a fully broken-down project quote/estimate? Is it a specific revision of drawings? Is it a written scope of works? The tricky thing with scope and pricing is that, generally, if it’s not explicitly excluded, it’s deemed to be included as long as it’s shown on drawings, so append more detail rather than less.
Variations or change orders are any modifications to the scope that are made during construction usually with a money and/or time implication. Sometimes it’s not practical to obtain a quoted variation prior to the new scope being actioned on site, and that’s okay, as long as you approve it to go ahead.
Whatever the default process, it should be stipulated within the contract so you don’t get any surprises later on because you asked for something extra without realising and it was actioned without the additional cost being brought to your attention.
Time
Is there a specified timeline, is there a timeline appended to the contract, and is there anything like a performance bonus included to motivate your builder?
Usually, a contract will stipulate a start date and a construction period, such as 16 weeks, and therefore a proposed completion date. A savvy builder will append a timeline to the contract showing these dates and how the breakdown of tasks will be scheduled to meet specific milestone dates, such as council inspections, and the overall ‘practical completion’ (PC).
Sometimes during construction, a variation will incur a timeline delay that contractually pushes the PC out by an agreed number of days. Aside from that, your builder is expected to hit the date in the contract – but the default contract doesn’t include any kind of carrot to ensure this. One way to manage this is to include a performance bond, something like: they will be paid a $10,000 bonus if they hit a certain date, but if they are late that performance bond decreases by $2500 per week until it runs out. For smaller companies, in particular, or those in which the owner shares the performance bond with their foreman on site, this can be an effective strategy.
Quality
Is there a defect process and a defect remediation process in the contract, and are there retentions?
Second to budget blowouts, the most common concern homeowners seem to have is whether the workmanship will be up to scratch. Cue the defect process. ‘Defects’ is a blanket term that is used to describe actual defects such as paint touch-ups, as well as minor outstanding works that don’t hold up PC, such as finishing the installation of hardware.
Generally speaking, the onus is on you, the homeowner, to drive the defecting process – whereby you walk around your home, making a list of things your builder or their subbies need to fix up or finish
off. If you leave this right until the end of the project, when the builder has all but packed up and moved on to their next client project, then it can be a painfully slow process getting them back to site
to close these items out.
Ideally, your contract would deal with this by including defecting as a specific timeline milestone (commencement of defecting), a defect remediation period (how long you can claim defects for, such as three months following PC), and, in a perfect world, retentions.
Retentions are more commonly seen in commercial contracts, and most domestic contractors won’t like it, claiming that it eats into the majority of their very small margin. It is worth pushing for. It might look something like five percent of the total sum, with half of that returned at PC and half returned at the end of the defect remediation period. So, on every invoice, you withhold five percent of the sum due, and at the end of your project you pay them half of that five percent as a reward for achieving PC, and the other half at the end of the defect remediation period if all the defects have been remedied. If not, you have the right to get them fixed up by another contractor or handyman and deduct the cost of this from the money you’ve retained from your builder.
Between that and a performance bond, your builder will hopefully finish the project on time and to a high standard.
Escrow anyone?
If you’re really nervous about how the project is going to go, escrow is an option. Generally, the administration cost is such that it’s more likely to be used on a larger project – say, $500,000-plus – where there’s more at stake, but if you’re prepared to cover the cost of your lawyer handling the logistics, it may be worth considering.
The concept is that you pay the contract sum amount, or an agreed part thereof, into your lawyer’s trust account, and they hold it until the builder invoices for progress on site. If the invoice is approved, the lawyer releases the invoiced amount of money to the builder, drawing down on the sum they’re holding for you. If there’s a dispute over money owed, this is dealt with and the ordered amount released.
There are also specific escrow services available that will likely be more affordable than your lawyer – you can do your own research on this or get in touch with me for a recommendation.
Go professional
As with anything important, the best advice is bespoke advice, so do seek input from a property or construction contracts lawyer prior to signing away your biggest asset.
Words by: Jen Jones
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