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Building guarantees

Updated: 03 Apr 2008
Building-guarantees-hero

Introduction

Are building guarantees worth the paper they're written on? We investigate.

When something goes wrong with a major purchase you can usually turn to an independent complaints authority - unless your purchase happens to be a building project.

We take a closer look at your rights, and the cover provided by building guarantees.

Your rights

You have limited options if you and your builder have a falling out. You can try to settle the dispute directly - but if that doesn't work, who do you turn to?

In projects that use a standard building contract, there's an arbitration procedure in case of disputes. But many building hassles are over jobs that don't use a standard contract.

Mandatory warranties

Since November 2004, mandatory warranties - designed to protect consumers - have been inserted in contracts for building work. The warranties include the expectation that the work will be done competently using suitable materials, completed within a reasonable time and so on.

The problem is enforcing the warranties. You could take your building dispute to the local Disputes Tribunal - but the maximum claim a tribunal can hear is $20,000 (and that's with the consent of both parties). Many building disputes are for sums of money much greater than that. You're left with the courts, which are costly and often unpredictable; or with the Weathertight Homes Resolution Service, which deals only with leaky homes.

This is highly unsatisfactory. Consumers deserve better protection for one of the most costly purchases they're ever likely to make.

Licensed building practitioners' scheme

The Department of Building and Housing introduced a licensed building practitioners' scheme in November 2007. Occupational licensing aims to make sure that people in the building industry are competent and accountable. A building practitioners' board will hear complaints against licensed building practitioners (among other duties). But while the board can fine or suspend builders from the scheme, it isn't meant to be a form of redress for consumers.

So the cautious homeowner will still look for extra cover when building a house or doing renovations - such as a building guarantee.

Limitations and exclusions

There are two major building-trade organisations in New Zealand: the Certified Builders Association of New Zealand and the Registered Master Builders Federation.

Both organisations accredit builders, based on certain criteria (see www.consumerbuild.org.nz for details), and offer building guarantee schemes.

  • The Certified Builders' guarantee is run by Builtin New Zealand (it's called the "Homefirst 10 year Guarantee") and covers the work of a certified builder who belongs to the scheme.

  • The Master Build (MB) Guarantee is run by Master Build Services. You can apply for an MB Guarantee only if you've hired a registered Master Builder for the building project.

The cost of a guarantee varies, depending on the cost of your house and type of coverage you opt for (labour-only, three-year guarantee, five-year guarantee, and so on). We checked with both organisations and found that the most complete guarantees usually cost around $700 to $1000 (including GST).

Building guarantees - limitations and exclusions

Are they any good?

The guarantees give you a form of redress if something goes wrong. However, they act more like insurance policies than guarantees. And - while they cover loss of deposit, non-completion, and defects - there are important limitations and exclusions in these guarantees. (See Limitations and exclusions.)

Limitations

Master Build logo

Under the Master Build (MB) Guarantee, Master Build Services can decide whether the cost of fixing a defect is out of proportion to the loss or damage you've suffered. Instead of fixing the defect, Master Build Services can pay compensation.

The guarantee doesn't explain how the amount of compensation is worked out - for example, whether it's just Master Build Services' own estimate of your loss or damage.

Registered Master Builder's chief executive Pieter Burghout says that the homeowner can seek arbitration on the amount of compensation if they think the initial pay-out is too small.

Certified Builders logo

The Homefirst Guarantee's cover looks more generous to us than the MB Guarantee. But there's one important drawback: the Homefirst Guarantee doesn't cover "leaky" homes (for example, homes built with untreated timber and/or unventilated monolithic claddings).

Builtin NZ's Jim Rickard says the reason for this is: "our building guarantee is only intended to cover the obligations of the builder. Leaky home issues are clearly not just due to the actions of the builder - [there are questions] of design, materials and inspection regimes. We certainly do cover leaky homes due to the builder's faulty workmanship".

Exclusions

The MB Guarantee excludes liability for any defects that "could" have been discovered by the owner upon reasonable inspection before the date of final payment or possession. We think this clause is too subjective: what one person considers an "obvious" defect might easily be missed by someone else.

Another concern with the MB Guarantee is a clause excluding any damage that a building owner "ought" to have taken steps to mitigate. One major law firm told us that, in its experience, such damage can occur while the claims are being sorted out. Mr Burghout says this is a standard clause used in all international guarantees: "If it's clear a defect in the roof is causing damage, you have an obligation to do temporary repairs - which to us is common sense."

The Homefirst Guarantee contains a clause excluding cover for defects where variations to the building plans are carried out (a variation is work that wasn't in the original building schedule). Worst-case scenario: this clause could be used to reject your application for cover - even though the variations have no bearing on the defect you're seeking cover for.

Mr Rickard says that this has never happened in practice: "Although we accept that this exclusion could be interpreted this way, it is not intended to exclude all cover. We shall be addressing this clause in a proposed forthcoming redraft to ensure clarity."

Improving the guarantees

All homeowners currently get a fixed guarantee that's meant to cover many different building types and conditions. But the exclusions skew the guarantees in favour of the firms offering them.

The guarantees would provide consumers with far greater protection if Master Build Services and Builtin New Zealand relaxed some of their exclusions. But Mr Burghout says that relaxing exclusions is too simplistic:

"We can offer more variety, more options, but that comes at a cost ... the reason we can keep the cost of the MB guarantee low is by offering a standardised product which benefits consumers accordingly."

We still think that the guarantors could allow homeowners more room to negotiate on specific clauses when a guarantee is bought. Individual guarantees could be tailored to better suit different building needs.

Case studies

Job well done - Dean's story

Dean Horsburgh

Dean Horsburgh (pictured right) of Mt Maunganui found it easy to claim under the Master Build Guarantee. The roof had just gone up on Dean's new house when the builder, a registered master builder, vanished overseas taking with him the money that had been paid in advance.

With winter fast approaching, Dean called Master Build Services: "It was the beginning of May [2007] - the framing was up, and the roof was on - I couldn't let my house sit like that right through the middle of winter."

Dean says that Master Build Services moved quickly to find a replacement builder: "The whole process was very professional. I soon had another builder pricing the job - within three weeks I'd signed a new contract. Work was back on track by the beginning of June 2007."

But what happened to the advance payments that the first builder took? "Compensation was judged on the overall cost of the project - and the amount of work needed to complete the project. Obviously there are limitations under the guarantee; but I was satisfied with the process and subsequent compensation."

Dean says that, although having to make a claim under a building guarantee is never ideal, the MB Guarantee worked better than he expected.

Plugging the leaks - Sean's story

Sean Smith* of Upper Hutt rang Consumer with a complaint about the Master Build (MB) Guarantee.

Sean took out a "5-Year Alterations and Additions" MB Guarantee in 2001 when he and his wife decided to add a two-room extension to their home. The extension leaked from the beginning - and Sean wasn't satisfied with the many repairs carried out by the builder, a member of the Registered Master Builders Federation.

In March 2004, Sean asked Master Build Services to help make sure the builder's repairs were effective. Master Build Services contacted the builder and another round of remedial work was carried out. But when the leaks continued, Sean hired an independent building inspector and prepared himself for a long battle.

Sean qualified for a claim under his MB Guarantee - no problem there - but he found the service painfully slow. In February 2006 an MB regional service officer, the builder and Sean met on-site and agreed on suitable remedial work. Sean says that the work was supposed to be completed by the end of March 2006. But, as he reports, "that was the beginning of a long and frustrating 16 months".

Sean's convinced that the leaks would've taken longer to remedy without constant prompting and the help of his independent building inspector. Sean thinks that Master Build Services lacked both motivation and influence over the builder to make good on the repairs.

*Not his real name

Our advice

  • Most consumers see building guarantees as a complete back-up for building work. That isn't the case. When applying for a guarantee, make sure you understand how far-reaching the exclusions are and how they might apply to your building project.
     
  • Check www.consumerbuild.org.nz if you're thinking about building a new home or carrying out renovations. It contains useful tips that'll help make sure your new development goes according to plan. And it's free.

 

More information

More from consumer.org.nz

 

Report by Luke Harrison