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:
- NZS 3910 for construction;
- NZS 3916 for design and construct; and
- NZS 3917 for fixed term.
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 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.
Fixed price/cost reimbursement
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:
- The net cost of the items used in the contract works (being plant, materials, labour, and sub-contractor costs) plus allowances for on-site and off-site overheads and profit at the percentages stated in the special conditions; and/or
- Where and to the extent that the contract contains rates related to any item, the rates are to be used instead of the net cost of the item. Allowances are provided for on-site and off-site overheads and profit can only be added if they are not already included in the rates, which must be stated in the special conditions.
Clause 2.4 prohibits certain costs from being claimed, including:
- Costs which are not justified from the contractor’s records;
- Costs that were not reasonably and actually incurred; or
- Costs incurred due to default by the contractor.
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 proposed sequence of works and the dates for commencement and completion of the various activities, dates by which access to the site, or materials, services or work, is to be provided;
- A critical analysis providing an estimated duration for activities and any dependencies between the activities;
- The dates by which access to the site, or materials, services, or work, is to be provided; and
- The dates by which the contractor reasonably requires any materials, services, or work to be provided by the principal or any separate contractors.
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.
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:
- Materially alter the contract price;
- Materially delay completion; or
- Result in a breach of statutory duty.
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:
- Specified items that are critical to the performance of the project (i.e., items that could delay the works if lost or damaged); or
- Plant above a specified market value.
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:
- Increase or decrease the quantity of any work;
- Omit any work;
- Change the character or quality of any material or work;
- Require additional work to be done; or
- Change the level, line, position, or dimensions of any part of the contract works.
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:
- The estimated value of the contract works which have been carried out, excluding variations;
- The estimated extent and value of all work performed or other cost that is claimed for variations;
- Any advances for the estimated value of materials delivered to the site which are intended to be incorporated in the contract works but are not yet incorporated, are provided in the special conditions;
- Any advances for temporary works or plant or materials not yet on site for which payment is provided in the special conditions;
- The estimated value of cost fluctuations; and
- Any bonus to which the contractor claims to be entitled.
The scheduled amount
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:
- Identify the payment claim;
- State when the payment claim was served;
- State the due date for payment;
- Show the sum certified by the engineer, which shall comprise of the value of the payment claim, less previous sums certified by the engineer and less any deductions required under the contract or by law;
- Show the manner in which the certified sum was calculated;
- State the reasons for the difference between the certified sum and the claimed amount;
- State that the certified sum is provisional; and
- State that the provisional sum is provisional only until the expiration of 12 working days after date of service of the payment claim, after which it shall become the scheduled amount unless a replacement progress payment schedule is provided.
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:
- The amendments or deductions notified by the principal;
- The reasons for the amendments or deductions;
- The manner in which the payment schedule was calculated;
- The scheduled amount; and
- A statement that the progress payment schedule supersedes the provisional payment schedule.
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/.