The starting point of any construction project is the building contract. In some situations, no special formalities are required; the building contract could be written or oral, or a combination of the two.
From 1 January 2015, it has become mandatory to have a written contract for all residential building work that costs $30,000.00 (including GST) or more. This does not apply to subcontracts between a main contractor and a subcontractor.
Regardless of whether the construction work costs more or less than $30,000.00, it is strongly recommended that a written building contract is used. This is because disagreements in the construction industry are common. The consequences of not having a contract could include costly disputes on what the terms are or non-payment of work performed.
A well-drafted contract may protect you in difficult situations. For example, for contractors, a clause that allows you to apply the deposit towards the final invoice could mean the difference between making a profit or incurring a loss on the project. For owners, a clause that provides for liquidated damages could help you efficiently recover your losses due to delays.
So where can you find a building contract?
Unfortunately, building contracts can be expensive to draft. Thankfully, there are various standard form contracts out there. One of the most used building contracts are from New Zealand Standards, also known as NZS.
In general, the NZS contracts are widely considered to strike a fair and balanced approach between the parties and tend to be the default choice for most construction projects in New Zealand. They contain “tick box” type options for special conditions making it relatively easy to use for the parties. The three main contracts are:
In this article, we will look at the important clauses in NZS 3910 contracts. Even if you do not use NZS 3910, all building contracts should address the points discussed below.
NZS 3910
NZS 3910 is one of the most widely used form of contract for building and civil engineering construction in New Zealand. Generally, NZS 3910 is more suitable for major works as it contains detailed processes and the incorporation of an independent engineer to the contract. The role of the engineer has been discussed in the previous “Parties to a construction contract” (https://norlinglaw.co.nz/parties-to-a-construction-contract/) article.
NZS 3910 allows the parties to contract on fixed price or cost reimbursement basis.
If the parties wish to adopt a cost reimbursement basis, this will need to be expressly incorporated within the special conditions. Clause 2.4 clarifies how the contract price is calculated under a cost reimbursement basis, by either:
Clause 2.4 prohibits certain costs from being claimed, including:
The contractor is required to maintain records of its costs and allow the engineer to the contract to inspect these.
Clause 5.10 requires the contractor to submit a “simple” programme for the works within 10 working days of the tender being accepted. In general, this would be a timeline from the contractor specifying the due date for completion of each stage of the project and the subcontractors involved. The programme must demonstrate how the contractor proposes to meet the due date for completion.
Alternatively, the contractor may be required to submit a “comprehensive programme” within 20 working days. This must include:
The timeframe for submitting either kind of programme is short. For the contractor, the contract states that the contractor is not entitled to payment until the programme is provided. However, the time for providing the programme can be extended by agreement between the parties.
In the alternative decision, in Marshall Futures Ltd (in Liq) v Marshall [1992] 1 NZLR 316 (HC), Tipping J was of the view s 301(1)(c) permits creditors to be personally compensated in limited circumstances. Tipping considered whether “moneys which are the subject of the declaration of personal responsibility are payable to the company…for the benefit of the creditors of the company as a whole or whether they are payable directly to the creditor.” His conclusion was that monies would be payable if the claim was payable to the creditor directly, without needing the liquidator to be involved. However, this authority was not helpful to Mr Banks, as the liquidator would have had to be notified of the claim, which did not occur.
Clause 5.21 acts as an early warning system. It requires the contractor and the engineer to notify each other in writing as soon as they become aware of any matter that is likely to:
Where any of the above occurs, either the contractor or the engineer may require the other to meet to explore proposals to lessen the impact or avoid the matter altogether.
Failure to give advance notice may affect the value of any variation arising out of the matter but does not affect the contractor’s right to claim a variation.
NZS 3910 allows the parties to elect in the special conditions the risks that are to be insured and who is to arrange the relevant cover. Generally, the contractor is responsible for contract works, public liability and plant insurance for the duration of the project. Where the special conditions require the contractor to arrange plant insurance, it shall insure:
This allows the contractor to reduce insurance costs in respect of hired plant and equipment.
NZS 3910 provides that variations are to be determined by the engineer. The engineer may order variations that:
Clause 9.2.3 provides a process whereby if the contractor considers any matter should be treated as a variation, the contractor must, as soon as practicable, give written notice to the engineer of the proposed variation.
Within 1 month of receiving notice, or as soon as practicable thereafter, the engineer shall give notice in writing, either to confirm or disallow the variation. If the variation is disallowed, the engineer must give reasons for doing so. This process reduces disputes about whether a matter was a variation.
Where the contract includes a schedule of prices that contains prices or rates applicable to the nature of the variation (or have a sufficient relationship to the nature of work involved in the variation), or part of the variation, the base value shall be determined by applying those prices or rates. Where there is no schedule of prices and it would not be reasonable to derive new prices or rates, then the value of the variation shall be determined on the basis of net cost.
Clause 9.3.2 allows the contractor to propose a value. The proposal must be made within 1 month, or as soon as practicable, after the variation is ordered or confirmed by the engineer. The contract encourages the contractor and engineer to agree on the value of the variation. If an agreement cannot be reached, the value shall be determined by the engineer together with reasons for the valuation.
The contractor is to remedy defects and damage that result from defective workmanship or materials. Where there are defects, the engineer may issue notice of a defect to the contractor, after which the contractor has a specified time to rectify them. Defect notifications may be issued for a period of 3 months after the date of practical completion, unless otherwise stated in the special conditions.
If the contractor fails to remedy the defect, the engineer may instruct another to complete the work after giving the contractor 5 days’ further written notice. The reasonable cost of the work undertaken by the alternative contractor is recoverable from the original contractor.
NZS 3910 requires the contractor to issue payment claims in accordance with the contract to the engineer and the principal. The default provisions provide that payment claims may only be submitted for work carried out during periods of not less than 1 month. The contract imposes additional requirements that are in addition to the statutory requirements under the Construction Contracts Act 2002 (the Act), in that the payment claim must provide:
Once a payment claim is received, the engineer must provide a payment schedule within 12 working days. Within 7 working days, the engineer must provide a provisional payment schedule. It must:
The contract permits the principal to have a say in the scheduled amount. In particular, clause 12.2.4 provides that the principal has 10 working days after receipt of the claim to notify the engineer in writing of any amendments or deductions that the principal intends to make from the provisional sum certified by the engineer. The principal must include reasons for any amendments or deductions.
Where notice is given by the principal to the engineer of any amendments or deductions, the engineer shall provide a replacement payment schedule to the contactor and the principal which must contain details of:
It is important to note that failure by the principal in notifying the engineer of any amendments or deductions does not prevent the principal from requiring any amendments or deductions from subsequent payment schedules.
Broadly, the same process applies to final payment claims and payment schedules except for the timeframes.
Clause 13 provides a process for disputes to be resolved. It provides that all disputes must first be referred to the engineer within 1 month after provision of the final payment schedule, or no more than 1 month after any relevant adjudication determination. Provided that all parties agree, the parties are allowed to appoint an expert to make a recommendation to resolve the matter.
The engineer shall give a decision within 20 working days of receiving notice in writing from the principal or contractor requiring a decision.
If either party is dissatisfied with the engineer’s decision, the parties may refer the dispute to mediation under clause 13.3.1. If the matter is not resolved at mediation, either party can then refer the dispute to arbitration. Either party can also refer the dispute to adjudication under the Act, which can run at the same time as arbitration.
It is important to note that under clause 13.1.1 of the latest version of NZS 3910, the engineer’s decision, valuation or certificate shall be final and binding after 3 months unless it has been referred to the engineer for review under clause 13.2.1, or to adjudication. It is therefore important for the relevant party to ensure that it takes steps before the time limit expires.
The above terms are some of the important terms in NZS 3910. Navigating NZS 3910 can be challenging especially in complex projects that require comprehensive special conditions to be drafted. It therefore pays to have your contract checked to ensure that you have adequate protection before entering a long-term project.
Our lawyers at Norling Law have the expertise to review your contract and discuss strategies to protect your position in a construction project. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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