Understanding guarantees

Are professional organisations that require builders to offer ten-year guarantees pre-empting the government, or should builders and homeowners still have the freedom to choose what guarantees they offer and accept?

The Certified Builders Association recently announced that it is now mandatory for all members to give their clients an independent ten-year guarantee for work above $30,000. The announcement brings them into line with similar requirements for Registered Master Builders.

This has prompted many builders to ask what the difference is between a homeowner’s rights under the Building Act and the cover in one of these ten-year guarantees.

Put bluntly, if a building company is still trading then its customers can use the Building Act and other legal means to enforce their rights. However, if the company has closed down, its contractual and legal obligations can’t be enforced, because the company no longer exists.

Many builders say that’s okay, we don’t plan on going bust! The issue is that your customers can’t be sure you’ll be around for the next ten years if something does go wrong (and frankly, neither can you).

Unfortunately, some high-profile cases of building companies going bust have increased the public’s concern about this.

We don’t need to tell you about the pressures of running a building business, even the best sometimes get into difficulty and often through no fault of their own. This is why homeowners and their banks will often require an independent guarantee.

How does an independent builder’s guarantee benefit homeowners?

Third-party guarantees, such as Builtin’s Homefirst Builders Guarantee, reassure homeowners that they will:

• Protect the homeowner’s deposit.
• Complete the build if their builder can’t, as well as covering the extra costs to do so.
• Fix defects for up to ten years.

They are a guarantee of the builder’s obligations under their contract and in law. In a recent case in Christchurch, more than $1 million was paid on behalf of affected homeowners after their builder went bust, many of whom would otherwise have lost their deposit or faced increased costs to complete their homes or fix defective work.

Do builders have to provide them?

No. The new disclosure rules that came into force in 2015 only require you to disclose whether you can offer a guarantee, not to provide one.

However, building trade associations require their members to provide them and the government is examining whether they should be made compulsory. Either way, as more homeowners, and their banks, require these guarantees, being able to offer one could help builders win business.

How do they benefit builders?

It used to be that these guarantees didn’t benefit builders at all; however, this is changing. For example, under the Homefirst Builders Guarantee (HBG), if there is a claim after your initial 12-month defects liability period ends, the insurer will not chase you to recover their costs (although they may seek recovery from your subcontractors if they were at fault).

This effectively insures the builder from the cost of rectifying those defects that are covered by the HBG. Homefirst also includes $10,000 cover to refund deposits paid by the builder to a component supplier who then goes bust.

Overseas examples

In many Australian states, it’s a legal requirement for builders to provide what they call a home warranty for every project, and they can’t be licensed without first being approved to provide warranty cover. In the UK, more than 80% of all new homes are covered by a third-party ten-year guarantee, although the scheme there is optional.

In New Zealand, the current approach is to ensure the client understands up front, before they sign a contract, whether or not their builder is offering a guarantee and what that guarantee covers.

In a nutshell

You can’t predict what might happen to you or your business, certainly not over a period of ten years. It’s the reason you insure for any risk and it’s why third-party builder’s guarantees are increasingly being asked for by homeowners and their banks. For builders, depending on which guarantee you offer, they also now give cover for you too.