So you've decided to build a new home?

Topics covered in this article: Home Owners

Cameron Russell

Senior Associate

Senior Associate

Phone: +64 7 927 0561
Email: crussell@clmlaw.co.nz

LinkedIn

Bachelor of Laws, Bachelor of Commerce, University of Otago

 

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With the decision made to go with a new build, you will now be asked to make a number of decisions over a short timeframe.  Before you know it, you will be looking at colour charts, flooring samples and light fittings, and somewhere throughout that whole process a building contract will be placed under your nose for signing.

 
With all these things going on around you it is not surprising that an alarming number of people trust that their builder has got it right and simply sign the contract without having even read it.  Given that this is one of the highest value contracts a person is likely to sign we thought it would be helpful to jot down a few key points that you need to take into account when you are looking at a building contract.
 
The Builder
 
Are you dealing with an experienced builder with a proven track record or is this a start up issuing their first build contract.  You are going to need to do a little bit of digging and you should feel free to ask the builder for references from previous clients – google is also your friend here.  You are far better to find out at the outset a little bit more about the person you are entrusting with the delivery of your new home than becoming one of their horror stories..   
 
Fixed Price versus Labour only 
 
What is the basis upon which you are entering into the contract from a pricing perspective?  Are you simply engaging the builder to provide labour only or are you expecting a fixed price turnkey solution (or somewhere in between)  With each option the allocation of delivery risk is significantly different and therefore will be price accordingly.  You will need to consider where risks such as delays, unforeseen ground conditions, availability of materials or weather events sit and which party is best to carry and therefore price those risks. 
 
Payments 
 
Most building contracts will contain a number of stage payments which are due at designated stages throughout the build.  It is important to ensure that the amount specified at each relevant stage represents a fair payment for works completed to date.  Paying too much money up front can leave you in a difficult situation should the builder suffer financial difficulty during the construction process.  On the other side of the coin, not paying enough will put financial pressure on the builder.  Essentially, you want to ensure that you have enough money left over in the tin to to complete the job at all stages of the process. 
 
You will also need to consider how you are going to finance the build and you will need to work closely with your banker to ensure that the drawdown of funds that they will make available will align with the timeframes and stages for payments under the building contract.  Ideally, you would have your banker sign off on the payments due under the construction contract prior to signing the contract. 
 
Delivery Timeframes 
 
Most people assume that once the contract is signed the builder will proceed immediately with the commencement of the works and completion of the home.  However, under most standard form building contracts, there is no timeframe for the commencement of the works let alone the completion of the works.  It is a good idea to ask your builder to include a specific provision detailing when the works will commence and when they are due to be completed.  To give these provisions teeth, a liquidated damages clause should be included in the contract – such a clause specifies that a daily or weekly rate that will apply should the builder fail to commence and/or deliver by the specified dates.  This amount (which is agreed between the parties at the outset) should take into account things such as mortgage payments and alternative accommodation costs.  However, you will need to consider that in including such a provision you are essentially transferring further risk to the builder and be priced accordingly. 
 
Floor Plans and Detailed Building Specifications 
 
It is important that the contract contains a detailed list of exactly what is due to be included in the build and detailed plans specifying what you are expecting to receive.  It is important to consider the size, shape and orientation of each of the areas of the property to ensure that you are happy with the same.  Any variations that you deem necessary at a later date will likely come at a significant cost and should be avoided where possible.  Ask your builder/designer whether they have a 3D programme available to enable you to get a better idea of the look and feel of the home once built. 
 
Guarantees 
 
So your building is complete, the building company has moved on and you find that there are issues with the home.  Who do you turn to at this point?  Most building companies offer an independent guarantee for example the Master Builder Guarantee that will apply for a fixed period (usually 10 years).  These are usually at an extra cost but will provide you with peace of mind should the relevant builder no longer be around when the issue arises.  These guarantees often also contain cover should the builder tip over during the building process. 
 
As with any contract, you need to take the time to read and understand what it is in it before putting pen to paper and signing your name on the dotted line.  If there are any provisions of the contract which you are not comfortable with or do not understand you should seek guidance from you lawyer before proceeding.