Residential Building Contracts: Homework is important when building
Building a new home can be exciting, as well as being rather daunting. Stories abound of disappointments and building hassles. But it needn’t be like this if you do your homework before starting the build, read and understand the building contract and make sure you get professional advice before you sign the contract.
When building your new home it’s important to carefully read and understand the building contract. Research the building company to find out who owns and controls it, how long it’s been in business, who you’ll be dealing with on a day-to-day basis, and any issues the company, its directors and shareholders have experienced. Speaking to other people who have recently used the building company is also a good idea. Below we list (it’s not exhaustive) some of the main points you need to consider whilst you build.
If you are borrowing money to build your home, before you sign the building contract make sure that your lender has reviewed the contract, approved your finance unconditionally and agreed to meet the progress payments as specified in the contract. Get this agreement in writing from your lender. Most building contracts allow the building company to charge penalties if you’re late in making a payment. If your lender is making the progress payments for you, make sure it will meet those obligations on time on your behalf. It’s very important to ensure that the final payment is due after issue of the code compliance certificate, not on practical completion.
House and land package
If you’re buying a house and land package (the build company is building a home for you and selling you the land in one transaction), you shouldn’t make progress payments. You shouldn’t pay for improvements on land that you don’t own. You should only pay a small deposit (no more than 10%), with the balance payable when the house is completed, including issue of a code compliance certificate. Then the title to the land and house are transferred to you.
The total build cost specified in the contract is usually subject to variation. With a fixed budget for your build you need to understand what cost increases the building company can pass on to you. Most contracts allow the builder to pass on increased costs arising from changes to the plans and specifications required by the local authority for the issue of required consents (building and/or resource consent), any increase in the cost of materials and labour between signing the building contract and undertaking the build, and the increased costs arising from additional excavation and/or foundation work.
The contract will probably not include a timeframe for the builder to start work after the building consent is issued or a timeframe within which the builder must complete the build. We recommend that the building contract includes reasonable timeframes, and for penalties to be paid by the builder if those timeframes aren’t met. Penalties will allow you to recoup all or some of the costs you will incur from late completion of your home. You should also include a clause allowing you, at your option, to cancel the contract if the build isn’t completed within an extended timeframe.
Plans and specifications
Before you sign the contract the plans and specifications must be finalised and they must exactly record your instructions and intentions. The plans and specifications must be referred to in the contract and be annexed to the building contract so they form part of that contract. You should initial the bottom corner of every page of the building contract, including every page of the plans and specifications.
Verbal statements versus written contract: You shouldn’t rely on verbal agreements between you and the builder. Insist that everything you agree with the builder is written into the building contract.
Master Build Guarantee
We recommend you obtain a Master Build Guarantee, and ensure that the contract includes an obligation on the building company to remedy any defects that arise within 90 days of moving into your home. If possible, you should retain 5% of the final instalment until all defects within the 90-day period have been remedied.
It’s vital that your new home is insured throughout the build; the building contract must specify whether it’s your responsibility or that of your builder. If you’re borrowing money for the build, the lender will require insurance. The builder should also have current public liability insurance.
Don’t, under any circumstances, make advance payments to your builder. You must ensure that your progress payments accurately reflect the value of the work that’s been completed, and then you pay.
Getting professional advice before starting your build will help ensure it goes smoothly and there are no surprises. Happy building.