How to ensure your builder does the job correctly

Choosing a builder and entering into a contract

Introduction

Hiring a builder will frequently involve substantial sums of money. You should therefore take considerable care, not only in planning the building work, but also in choosing your builder and negotiating a contract.

The CONSTRUCTION CONTRACTS ACT 2002 (in force on 1 April 2003) contains important provisions dealing with progress payments and the resolution of disputes. The Act is intended mainly to address problems in the building industry of subcontractors not being paid by head contractors. But, with some exceptions, the Act also applies to homeowners contracting with builders.

The builder

Before contracting with a builder you should ask what houses he or she has worked on. If possible, contact the owners of the properties and see if they'll let you examine the builder's work.

It's also advisable to find out whether the builder is a Registered Master Builder. A Registered Master Builder will have a licence, which is renewed every two years; ask to see it. You can also contact the Registered Master Builders Federation to verify that the builder is in fact registered and has a valid membership number (phone 0800 269 119).

The RMB Federation will also refer you to particular builders in your area, taking into account your particular requirements. This referral service is free. (The 22 local Associations belong to the national Registered Master Builders Federation. The Federation operates a website at www.masterbuilder.org.nz, where you can obtain a list of Registered Master Builders in your area, and also check whether a particular builder is a Registered Master Builder.)

Clients of Registered Master Builders can obtain advice and assistance from the local RMB Association. Also, Registered Master Builders can offer a seven-year guarantee on their work. For more information, ring the local Association or visit www.masterbuilder.org.nz (under About the Guarantee).

The price

You should get a quote for the job, not an estimate. A quote is a price that legally binds the builder; the builder is not bound by an estimate.

You should obtain quotes from several different builders – don't simply go with the first quote you're given. Use the Registered Master Builders Federation's free referral service at www.masterbuilder.org.nz.

The contract

Your building agreement should suit your particular project. You don't have to use your builder's standard contract. Your Registered Master Builder can provide a range of standard contracts that will protect your interests, but only if you are building with him or her.

When entering into the contract, you should consider the following:

  • The particular terms of the contract will determine what the builder is required to do under the contract in relation to complying with the Building Code.
  • The contractor should provide plans and specifications to be attached to the contract. These should include the date at which each stage of the project is to be completed.
  • Penalties for delay by the builder should be included as negotiated between you. But a satisfactory agreement may be hard to achieve as builders can be delayed by bad weather. The possibility of delays needs to be taken into account, especially if you're selling your current home.
  • You should also include a maintenance clause, under which the builder will be liable to fix any defects that arise within a specified period after the project is completed.
  • If you're using a Registered Master Builder, you should negotiate for the contract to include a five-year Master Build Guarantee. You can find out more about this from your local RMB Association or at www.masterbuilder.org.nz (under About the Guarantee).

"Pay when paid" and "pay if paid" clauses

Your building contract cannot include a clause that says that you won't have to make a payment to the builder (whether a progress payment or full payment) unless and until you receive a payment from a third party. If that kind of clause is included, it will have no legal effect. This means that you will have no legal right to withhold the amount: you must pay it. This type of condition in building contracts is often called a "pay when paid" or "pay if paid" clause.

This rule is contained in the CONSTRUCTION CONTRACTS ACT 2002, which is in force on 1 April 2003. It's intended mainly to protect building subcontractors from non-payment by head contractors. But the rule will also apply to a contract between a homeowner and a builder.

Council inspections

Your local council will make periodic inspections during the building process. They will make a final inspection when the building is completed. They will then either issue a Code Compliance Certificate or notify you of things that must be corrected before the Certificate can be granted.

Progress payments

Do I have to make progress payments to the builder?

If you're living or intend to live in the building in question, you must make progress payments only if your contract requires this. You and your builder are free to decide on whatever method you choose for determining what progress payments you will make, including:

  • how many there will be
  • how much each payment will be
  • the interval between payments, and
  • the date when each one is due

The rule is different for commercial construction contracts – that is, if you won't be living in the property being built or modified. If a commercial contract doesn't include any rules for progress payments, the CONSTRUCTION CONTRACTS ACT 2002 sets out some default rules that apply automatically. Under these default rules, your builder will have a right to monthly progress payments, calculated on the basis of the value of the work done during the relevant month.

The reason for the different rules for residential and commercial construction contracts is that homeowners will usually not be familiar with practices in the building industry. They should therefore have to make progress payments only if they've explicitly agreed to them with the builder.

The procedure for claiming and making progress payments

If you're legally required to make progress payments (see above), the builder will claim a progress payment by serving a "payment claim" on you. The builder will do this at the end of the month to which the payment relates, or at the time specified for this in your contract. The builder's payment claim must be in writing, and must give details about:

  • the construction work
  • the period to which the payment claim relates
  • how much money is due and when, and
  • how the builder calculated the amount

If the building is your home, the builder's claim must also explain to you:

  • how you go about responding to the claim, and
  • what will happen if you don't respond to the claim or don't pay the amount

This additional information for home-owners must be in the form set out in the CONSTRUCTION CONTRACTS REGULATIONS 2003 (SR 2003/30), Schedule 1, Form 1.

What if I disagree with the amount the builder is claiming?

If you disagree, you can respond by giving the builder a written "payment schedule", stating the amount you think you should pay. You'll need to specify:

  • how you calculated this amount
  • why it's different from the builder's claimed amount, and
  • if you're withholding payment on some basis, your reasons for doing this

What happens if I don't respond with a payment schedule or don't pay?

If you haven't provided the builder with a payment schedule within

  • the time specified in your contract or,
  • if your contract doesn't specify a time, 20 working days after the builder served the payment claim on you,

you become legally liable to pay the builder's claimed amount on the due date for the progress payment.

If you then don't pay the amount by the due date, it becomes a debt that the builder can recover from you in the courts, along with legal costs.

If you do provide a payment schedule but don't pay your proposed amount by the due date for the progress payment, similarly the builder can recover your proposed amount, along with costs, in court.

In summary, if the builder makes a claim and you neither respond to it nor pay it, or if you respond with your own schedule but don't pay your proposed amount, you're legally liable for the relevant amount as a debt.

Can the builder suspend work if I don't pay?

The builder cannot suspend work if it's a residential construction contract, but can suspend work if it's a commercial construction contract.

Disputes with builders

What can I do if I have a dispute with my builder?

If, for example, you have a dispute about whether you're liable to make a progress payment or about the standard of work that's been done, either side can take the dispute to an adjudicator under the scheme set up under the CONSTRUCTION CONTRACTS ACT 2002. You can use this adjudication procedure even if the dispute is already being dealt with by some other court or tribunal.

If you're the one initiating the process, you do this by serving a written "notice of adjudication" on the builder. This notice must state:

  • the date of the notice
  • the nature and details of the dispute and the parties involved
  • what you want done about the problem
  • details that are sufficient to identify the building contract, including
  •  
    • the names and addresses of you and the builder, and
    • if they are available, the addresses that you and the builder have given for being served with legal documents

If the builder is initiating the adjudication, and the building is your home, the builder's notice must also:

  • explain to you your rights and obligations in the adjudication process, and
  • briefly describe that process

If the builder's notice doesn't do this, it has no legal effect. This additional information for home-owners must be in the form set out in the CONSTRUCTION CONTRACTS REGULATIONS 2003 (SR 2003/30), Schedule 1, Form 2.

How is an adjudicator chosen?

You and the builder can agree between you on whom you want to decide your dispute. This person is called the "adjudicator".

If you and the builder can't agree on someone, it may be that you can agree on someone you both trust to choose an adjudicator for you. (This person whom you agree on is called a "nominating body" in the CONSTRUCTION CONTRACTS ACT 2002.)

If there's no disagreement between you but you simply can't find someone willing and able to decide the dispute, you can request an "authorised nominating authority" to choose an adjudicator. These nominating authorities will be appointed by the Government. It may be that arbitration and mediation organisations – for example, the Arbitrators' and Mediators' Institute of New Zealand (AMINZ) – will apply to be appointed as nominating authorities. To contact a nominating authority, you should contact the Ministry of Economic Development (check their website for information at www.med.govt.nz).

Your request to the nominating body or nominating authority must be in writing and you must give them a copy of the notice of adjudication.

Making an adjudication claim

Once an adjudicator has been chosen and has accepted the role, you must refer your dispute to the adjudicator within five working days of receiving the adjudicator's notice of acceptance. You do this in writing by providing the adjudicator with an "adjudication claim".

Your adjudication claim must state the nature and grounds of your dispute. You must also provide a copy of the notice of adjudication, if it is still relevant. You can also provide the adjudicator with any other documents that you think are relevant.

You must serve a copy of your adjudication claim on the builder.

Responding to an adjudication claim

The builder – or you, if the builder is initiating adjudication – must give the adjudicator a written response within five working days after receiving the claim, or within a further time that both sides agree on or that the adjudicator allows. The builder must give you a copy of the response and of any accompanying documents.

How does the adjudication process work?

Adjudicators are free to adopt any procedure that they think is best. Specifically, they have the power:

  • to require you and the builder to make written submissions within a particular time
  • to provide copies of documents
  • to appoint an expert adviser to report on particular issues
  • to call a conference of the parties
  • to inspect any construction work (but only with your consent or, if you're the landlord, the consent of your tenants; you can't unreasonably withhold consent)

The adjudication process is confidential.

Do I need a lawyer?

You're not required to have a lawyer, but you can have one if you wish. Under the adjudication scheme, you're entitled to have someone to represent you, and this can be a lawyer or anyone else.

How much will it cost to go to adjudication?

Each party must meet their own costs and expenses. But the adjudicator can order a party to pay costs and expenses if the adjudicator thinks that party caused them unnecessarily through bad faith or through making unfounded allegations or objections.

How will the adjudicator decide the dispute?

Adjudicators must act independently, impartially, and in a timely manner. They must deal with the dispute according to the rules of natural justice, which usually means not being biased and giving both sides a fair hearing.

In making a decision, the adjudicator will consider:

  • the provisions of the CONSTRUCTION CONTRACTS ACT 2002
  • the terms of your contract
  • the adjudication claim and the response to it
  • any expert reports
  • any inspections that the adjudicator has carried out, and
  • anything else that's relevant

The adjudicator's decision

The adjudicator must make a decision within 20 working days after the deadline for the builder's response has passed (see above). But adjudicators can extend this by another 10 working days if they think it's reasonably necessary. Also, you and the builder can agree to allow the adjudicator further time.

The adjudicator will give both sides a copy of the decision. It must be in writing and give reasons.

How are adjudicators' decisions enforced?

If the adjudicator rules that you must pay an amount of money, you must pay this amount within:

  • two working days of being given a copy of the adjudicator's decision, or
  • any later time that the adjudicator has specified

If you don't pay it within this time, the builder can go to court to recover the amount from you as a debt, along with legal costs (see related article How to recover a debt from an individual). You're legally bound to pay the amount even if you've applied to the High Court for judicial review of the adjudicator's decision or if any other court proceedings to do with the dispute have begun.

If the dispute was about rights and obligations under the contract rather than a sum of money, and one party hasn't comply with the adjudicator's decision, the other party can go to court to have their rights under the contract enforced. The court will take the adjudicator's decision into account but doesn't have to follow it.

Cautionary notes
  • It's vital that you understand clearly each term of your contract with the builder, especially the schedule of progress payments. This is essential if you're buying a home on a section owned by the builder, because if the contract is unconditional when the money is paid over, it can be difficult to get the money back should things go wrong. You should not make the final payment until the Code Compliance Certificate is issued.
  • You should keep as involved as possible throughout the building process.


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