Do you have a written construction contract? While it’s not yet mandatory, it’s a great way to avoid disputes by clearly setting out the rights and obligations between contractor and client. Make sure yours has the right components!

As many involved in the building industry may be aware, over the last four years, the Government has been in the process of reviewing the Building Act 2004 with the aim of reducing the costs, but not the quality, of the building control system.

“While it’s a good idea to get legal advice on any contract, it is notmandatory, and you can create your own contract to suit the way you and your clients wish to work

As part of the proposed changes, there is currently a law change before Parliament, which will make it mandatoryfor certain types of construction work to have a written construction contract. The law change is also likely to introduce new requirements that will need to be included in construction contracts.

Written construction contracts

Although the requirement to have a written construction contract is not yet mandatory, contractors may wish to take the opportunity to consider:

1. Whether they are currently using a written construction contract and;
2. Whether the written construction contract they are using clearly and adequately sets out the rights and obligations between the contractor and the principal (client) in relation to the work that will be carried out.

Having these things set out clearly in writing is good business practice and helps to minimise the chances of disputes and payment delays down the track.

Options for a written construction contract

There are a number of very good, and easy-to-follow, standard construction contracts available. Members of organisations such as the Registered Master Builders have access to an excellent range of written contracts that can be used as is, or adapted for specific needs.

For longer or more complex projects, the detailed standard forms (like NZS 3910) are best. Many builders have also developed their own bespoke contracts over the years.

Key things to include in a construction contract:

Creating a contract can be inexpensive and fairly straightforward. While it is a good idea to get legal advice, it is not mandatory, and you can create your own contract to suit the way you and your clients wish to work. Broadly speaking, your contract can contain whatever terms you and your client agree upon. But here is a list of the major terms your contract should cover:

1.  Parties to the contract

Specify who the parties to the contract are. Are you contracting as yourself, or your company?

Who is your client? Are you contracting with a company, a trust or the owners personally?

2.  Date of the contract

Make sure you include a date of contract. This can be important later on.

3.  Address or description of the site

You should identify the address where the work will be done. This is particularly important if you are working on more than one site owned by that client.

4.  Type of contract

It is important to specify the type of contract. For example, it could be:

• A full contract, where you are responsible for all labour materials and site supervision, including supervision of your or your client’s subcontractors.
• A labour-only contract.
• A managed labour contract, where the client purchases materials and you carry out and supervise work, including supervision of your or the client’s subcontractors.

5.  Scope of work that will be done

You need to be as clear as possible about the exact scope of the work to be done under the contract. This is particularly important, if you are not in control of the entire project.

If you are only responsible for part of the work, it is important to specify who is responsible for checking the interface between your work and the work of previous or subsequent contractors.

6.  Other contract documents

Consider whether you need to incorporate other documents into your written contract, such as your tender/estimate/quote, drawings and specifications, building consent conditions or other documents.

7.   Variations to the contract

You should outline the process for how any variations to the written contract will be handled. This may mean including a requirement that variations be ordered and priced in writing and signed off by both parties.

8.  Timing of the work that will be done

When describing the time frame in which the work will be completed, you should include (as far as possible):

• When you will start the work.
• The estimated end date.
• What happens if you’re late in completing the work.
• What happens if others delay you.

9.  Insurance

Having appropriate insurance cover is a requirement that must be addressed before the project begins. The contract should state who is responsible for insuring the contract works and who is to be named as ‘insured’ under the Contract Works Policy.

10.  Price and payment claims

Being clear about how the contract price is calculated is crucial. Clients hate surprises when it comes to costs!

It is also important to state when and how often payment claims can be issued. If this is not stated in writing, the fall-back position (under the Construction Contracts Act 2002) is that payment claims will be issued monthly.

A reminder about payment claims:

If you wish to take advantage of the enforcement provisions in the Construction Contracts Act 2002, your payment claims must be served on the payer and must:

• Be in writing.
• Contain details to identify the written construction contract to which the payment relates.
• Identify the construction work and the period to which the payment relates.
• Describe the claimed amount and due date for payment.
• Describe how you calculated the claimed amount.
• State that the payment claim is made under the Construction Contracts Act 2002.

If a payment claim is made on a residential client, it must be accompanied by a written notice describing the process for responding to the payment claim, and explain the consequences of not responding if full payment is not made by the due date. There is an online form you can use for this.

11.  Due date for payment

It is also important to state when payments are due. If this is not stated in writing, the fall-back position (under the Construction Contracts Act 2002) is that payments are due 20 working days after the payment claim was served. The payment section should also include whether interest is payable on late payments.

12.  Defect repair period

Your contract should include a defects repair period, during which you are responsible for repairing or rectifying defects that appear in the contract works.

This usually begins upon practical completion of the works and runs for a specified time frame (one, two or three months are common periods for small to medium projects).

13.   Disputes

It is important to set out an agreed method for resolving disputes, should they arise. Negotiation and mediation are commonly used dispute resolution processes. Arbitration is also commonly included in construction contracts, but this can be a very expensive and time-consuming process.

It is also very helpful to include a clause that says, even if there is a dispute, the payer cannot withhold payment from you.

Contact information

We will keep you updated in relation to the proposed changes to the Building Act 2004 and the requirement to have a written construction contract in future articles.
If you have any questions about these issues, or would like to discuss them in more detail, please contact Jo-Anne Knight at jo-anne.knight@simpsongrierson.com, or Andrew Tetzlaff at andrew.tetzlaff@simpsongrierson.com.
The information in this article is intended as a general guide only and is not intended to be legal advice.
Detailed legal advice should be obtained to cover a specific situation.