21 March 2016

Building Or Renovating A House: Six Things To Consider

Are you considering building a new house or renovating an existing one? Here are six useful pointers for you to consider.

Building a house or doing renovations is hardly ever a smooth process.  When problems arise, the building contract takes centre stage and unfortunately it usually protects the builder more so than the owner.  Here are six things to consider when a contract is put in front of you to sign:

  1. Fixed Price Contracts:  A fixed price contract should in theory mean that the builder takes the risk for and pays for any increase in the price stated in the contract.  In practice though, there is no such thing as a fixed price contract.  The builder will always include rights to adjust the price in certain situations.  Some are reasonable but the key point is they should all be considered carefully, particularly where you will be stretched financially if further costs are charged. 
     

  2. Cost Fluctuations:  This is the most important price adjustment clause to consider.  It will appear in most contracts and will allow the builder to increase the price if there is an increase in the cost of materials or subcontractors.  The builder would add their margin to those extra costs, typically around 10% (plus GST, and you may not be able to recover the GST).  Most builders should be able to secure fixed prices on materials or subcontractors so consider deleting the clause.  If the builder resists, have them list the specific items that cannot be on a fixed-price basis and check whether you can accept possible increases within your budget. 
     

  3. Variations:  Clauses that would allow the builder to adjust the price where there are variations must be carefully considered.  Some contracts allow the builder to claim a variation where extra works are necessary that are not covered in the plans and specifications.  Usually the builder prepares the plans and specifications so you should consider only agreeing to pay for variations where the variation is requested by you.  Builders should also be able to claim variations where there are problems with the land, such as subsidence, or where extra works are required as a condition of the building consent.  It is important to acknowledge that there will almost definitely be a variation of some sort on a project.  So always have extra funding to turn to if the unexpected happens. 
     

  4. Mortgage:  Clauses that allow the builder to register a mortgage or caveat against your property should be deleted.  A mortgage or caveat will prevent you from refinancing or selling the property.  It could be months before you can force the builder to release their mortgage, even where you have a genuine dispute. 
     

  5. Bank:  If you intend taking a loan to pay for the cost of the works, make sure the bank tells you what conditions will need to be satisfied before they release funds at each stage.  Some banks will want a certificate from a quantity surveyor confirming the works referred to in the invoice have been done properly.  The building contract will need to be changed to allow for this.
     

  6. Monitoring:  Have an independent builder monitor the quality of the works at key stages.  This is very important to identify problems before they are built over.  Of course there will be a cost but it is certainly worth it. 

These are a few of the more important points to consider before signing a building contract.  Taking legal advice should be regarded as a key component of the process.  The cost of doing so is relatively minor when compared to the potential extra costs that could be incurred if the contract is not changed.  Likewise builders should be careful about accepting any amendments to their industry standard form without advice.  In our experience, builders can sometimes be too willing to accept changes, perhaps to get the customers ‘signed up’.  We are happy to discuss our fee arrangements with you.  

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.

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