Constructing the right contract

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It’s an exciting time to be involved in the construction industry in the North.

Large construction projects are popping up everywhere, from renovation and residential houses through to large scale commercial developments, involving local players through to significant national (and international) projects. Usually, disputes in construction aren’t about defects, but rather grey areas the parties haven’t considered such as unforeseen costs or work. Getting the right building contract in place up-front can avoid a lot of pain.

So, what are the options?

Commercial construction (large scale)

The industry standard in New Zealand for large scale work is the NZS3910:2013 agreement, which includes having a designated professional engineer run the project, decent mechanisms for allocating risk and resolving disputes, and being designed to work with the Construction Contracts Act 2002 payment regime. NZS3910:2013 has been used successfully on projects ranging from $500,000 up to hundreds of millions of dollars.

The NZS3910 is an “off-the-shelf” product and its general conditions provide a good balance of risk between principal and contractor, but there are always murky areas. The form allows for amendments, so we recommend tailoring it to make sure it reflects the specific project requirements e.g. critical timeframes, quirky designs, sensitive neighbours and specialist equipment. Bespoke special conditions can ensure everyone involved is clear about who is responsible for each part of the project.

Other options for large scale construction contracts are the international FIDIC contract or variations of the NZS forms for design/build or maintenance contracts. However, NZS3910 remains the industry standard in New Zealand.

Experienced customers (mid-scale)

For smaller projects, the principal/owner may feel they do not need to pay for a professional engineer or project manager. The New Zealand Institute of Architects produces a building contract which includes an architect involved in the project from start to finish who will perform a similar role to the engineer. There is also another version of the NZS3910 contract (NZS3915) in which the owner manages the project themselves.

Principals/owners should think carefully about whether they have the time and expertise to step into the shoes of a project manager before opting for one of these solutions. Where these contracts are applied to residential homes, they will need to be amended to reflect the Building Act obligations which builders/developers (“on-sellers”) owe to the end consumer/home-owner.

Individual or residential builds

When building a new home or bach, the contract will often be an industry template provided by the building company or the Registered Master Builders’ Association. These can sometimes be “builder friendly” and with limited scope to negotiate. However, the company providing the contract will have their systems set up around that contract which can be more efficient and cost less overall. As with all business, there are good and bad examples of these contracts, so we recommend getting advice before putting pen to paper.

In the excitement of getting a project underway, preparing a robust contract can become an after-thought. We recommend getting advice and preparing construction contracts in conjunction with any preliminary design and ahead of any tender. This allows the contractor to consider the requirements of the project and either negotiate or build any issues into their price for later discussion.

If you have a question about a potential construction project or dispute, please contact one of our construction law experts.