No room for error

Are you using NZS 3915 – A Contractor’s Construction Contract? Know what it means for you

What’s my right to a variation under the contract? When do I have to pay this Payment Schedule? Who’s responsible for insuring materials on the site? How do we resolve this dispute?

These sorts of questions pop up around building sites all over New Zealand every day. But for Contractors (builders) and Principals (clients) without a written construction contract, finding answers is often more challenging than the project works themselves.

As discussed in previous articles, the government has recently passed an amendment to the Building Act 2004 to help parties answer these sorts of questions. As a result, it will soon be mandatory for certain types of construction work to have a written contract. It is expected that this amendment will be in force by the end of this year (see our article More than a Handshake – November 2013 – for more details).

Now is the best time for Contractors and Principals alike to get up to speed on these changes, and to learn about the types of contracts used in the industry. In this month’s article, we will discuss construction contract – NZS 3915:2005.

WHAT IS NZS 3915:2005?

NZS 3915:2005 is a standard construction contract designed for situations where no person is appointed to act as Engineer to the Contract.

NZS 3915 removes this traditional supervisor role and replaces the Engineer with a Principal’s Representative – meaning the client or the client’s chosen appointed person will need to manage the work directly. This change has significant effect on the contractual processes for payments, variations, extensions of time and dispute resolution.

It’s important to note NZS 3915:2005 is based on NZS 3910:2003, not the new NZS 3910:2013. The changes made in the new NZS 3910:2013 (mostly used for larger, commercial projects) have not been brought across to NZS 3915 (mostly used for smaller, residential projects). It is unclear when NZS 3915 will next be reviewed by Standards New Zealand.

WHEN SHOULD I USE NZS 3915?

NZS 3915 is not as widely used by the industry as NZS 3910, but is more commonly used in smaller residential projects as opposed to larger, commercial ones. Principals often perceive this contract to be ‘contractor friendly’, so it’s not always a first choice. However, NZS 3915 does still have a place as a standard form construction contract. The document can be useful where:

• There are financial and practical drivers for not using an Engineer, such as where the project is small, and it is more cost-effective for the Principal not to appoint an Engineer and to administer the Contract themselves; or
• The Principal is a skilled project manager with appropriate competencies.

WHAT ARE SOME KEY AREAS I SHOULD LOOK OUT FOR?

Under NZS 3915, the Principal is often required to ‘step into the shoes’ that would normally be filled by the Engineer, in order to administer the contract. It  is vital that the Principal understands his/her contractual obligations before the works commence. The deadlines for specific actions in NZS 3915 are absolute; failure to comply with them can have cost and time implications for the Principal.

Some of the key areas for Contractors and Principals to keep an eye on are:

Principal’s Representative

As mentioned above, the Principal must nominate a Principal’s Representative to act on his/her behalf. This person performs duties on behalf of the Principal, including, among other things, giving directions and instructions to the Contractor.

The Contractor must deal with the Principal’s Representative in the same way as they would the Engineer under NZS 3910. However, it is important for Contractors to understand that the Principal’s Representative is under no obligation to act independently, impartially or fairly when administering the contract, unlike the obligations placed on the Engineer under NZS 3910.

It is vital for the Principal to appreciate the difference between having a Principal’s Representative and employing an Engineer to administer the contract. The amount of administration under NZS 3915 is no different than under NZS 3910, but in NZS 3915 there is no middle man to manage the contract. The buck stops with the Principal.

Payment Process

As there is no Engineer undertaking the evaluation and certification process, the Principal has to carry out this role his/herself. The Principal must understand his/her obligations under the contract, and in particular, its obligation to issue Payment Schedules (which define the date payments will be made) and make payments within the prescribed time.

During the payment process, it is also critical for the Contractor to be aware of what he/she has to do both under the Contract and the Construction Contracts Act 2002 (CCA). In particular, the Contractor must ensure that all of his/her payment claims conform to the requirements of section 20(2) of the CCA in order to receive the protections of the Act.

Payment claims must give details about:

• What work it covers.
• The period the claim covers.
• How much money is due.
• When payment is due.
• How the builder calculated the amount.
• What you have to do to respond to the claim, ie how to pay.
• What will happen if you don’t respond to the claim or don’t pay the amount.

Variations

The Principal may vary the Contract by written notice to the Contractor, and there are a wide range of circumstances under which variations arise. At first instance, the parties should try to agree on the value of the Variation. If the value cannot be agreed, the onus then falls on the Principal to determine the value of the Variation (after receiving the Contractor’s estimate). This is a very technical task and it is not reasonable to expect the average Principal on a residential project to carry out this exercise. A quantity surveyor or an engineer would likely be required to assist and any cost efficiencies in using NZS 3915 over NZS 3910 may quickly be eroded.

It is vital that the Principal is aware of the deadline for valuing variations. The Principal has 20 working days (from receipt of the Contractor’s estimated valuation) to determine the value of the Variation and notify the Contractor. If the Principal fails to comply with this deadline, the value proposed by the Contractor will be deemed accepted by the Principal.

Disputes

With no Engineer to decide disputes arising under the Contract, the parties must instead agree on an expert to hear their dispute. Either party may refer the dispute to the expert, who will issue a determination of the issue in writing (including reasons for the decision) within the tight timeframe of the Contract. This decision is final and binding, unless it is referred to mediation or arbitration.

Despite this express contractual dispute process, nothing prevents a party referring a dispute to adjudication under the CCA at any time. Adjudication provides a fast-track dispute resolution process, which may run in tandem with the contractual processes.

“NZS 3915:2005 is a standard form construction contract designed for situations where no person is appointed to act as Engineer to the Contract

WHAT ARE MY ALTERNATIVES TO NZS 3915?

NZS 3915 is an attractive contract form for contractors. Whilst the obligations of the Contractor remain very similar to those of NZS 3910, ignorance or poor administrative processes on behalf of the Principal can lead to ‘contractor friendly’ results.

However, if the Principal (your client) is asking for advice on which contract to use, and they are new to the construction process, it may be worth suggesting they use a contract that requires less administration and oversight from them, as this could lead to costly mistakes.

The new NZS 3910:2013 or NZS 3916:2013 (Design and Construct) contracts are preferable for larger jobs and both can be used un-amended for most projects. For an inexperienced Principal, the ‘buffer’ and expertise of a professional in the Engineer’s role can be money well spent.

If the Contractor is a member of Registered Master Builders or the Certified Builder’s Association, one of the standard form contracts provided by them can be appropriate. These are contracts designed specifically for simple projects and most Contractors are familiar with them. From a Principal’s perspective, these contracts are still somewhat ‘contractor friendly’; however, there are fewer hazards than in NZS 3915, which can trip up inexperienced Principals.

With construction contracts, it is usually a case of ‘horses for courses’. If you are unsure, consult a lawyer to discuss the right contract to fit with your expectations for your business or project.

More Information

If you have any questions about these issues or would like to discuss them in more detail, please contact Michael Weatherall at michael.weatherall@simpsongrierson.com

The advice 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.