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Types of building contracts

There are three main ways to engage the services of a builder - under full, labour only or managed contract. It is important to understand the differences so you know what a builder is quoting on.

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Full contract

When you engage a builder under a full contract, the builder quotes for a package which includes:

  • Supplying all the materials.
  • Hiring subcontractors such as the plumber, electrician, interior decorator etc.
  • Getting consents.
  • Liaison with the architect/designer.
  • Arranging inspections by the council inspector.
  • Managing the whole building phase.

The builder's quote should cover all of the above including the subcontractors fees (plus GST).

The builder is known as the main contractor under this type of contract and is responsible for the quality of work of his own staff and the subcontractors. Depending on who is managing the project, the chain of communication looks a bit like the diagram.

The builder is also responsible for health and safety on the building site.

You will have to work in with the builder at various stages, for example, when it is time to select the appliances, light fittings or floor coverings. You need to be ready with those decisions to avoid holding the builder or subcontractors up, as the delay will cost you money.

Labour-only contract

When the builder works for you on a labour-only contract you manage the whole process and the builder is only responsible for building. People take this option in the belief that they will have better control over the building process or because they want to save money. With this type of contract you either pay your builder by the hour, by the week, or a set price. Paying a set price will be incentive for the builder to work steadily to finish the job in a reasonable timeframe as the job would have been priced on a set number of hours.

The drawbacks of the labour-only contract are:

  • You become the main contractor which means you are responsible for the work meeting Building Code requirements and for any defects in construction. Just how much you are responsible for the builder’s work would depend on the facts in each case.
  • The responsibility for coordinating the whole project, i.e. making sure everything happens when it should, rests with you. It will probably take a huge amount of your time and energy to hire contractors, buy materials and manage the project, and at times it could be inconvenient to you, your family and your employer.
  • You are responsible for health and safety on the building site.

For everyone’s protection, make sure the duties of each party are very clearly spelt out in the building contract.

Builders’ concerns

Under a labour-only contract the builder still has a contractual obligation to perform the work to the standard in the contract. And a legal obligation under the Building Act 2004 to meet the Building Code and under the Consumer Guarantees Act to work with reasonable skill and care. The Consumer Guarantees Act does not cover houses, although it does cover materials and services provided.

Some builders are reluctant, or even refuse to take on work on a labour-only contract. Building processes have to be managed very precisely and if you are not on the ball to organise the subcontractors, materials and building inspectors, the builder will be held up. Waiting will not only cost the builder time but also loss of earnings while they are waiting (in the case of a set fee contract).

The builder can end up chasing around after the subcontractors, materials and inspectors even though they did not include management of the project in their quote.

Managed labour-only contract

Another option is the managed labour-only contract. This is part-way between a full contract and a labour-only contract. Under this arrangement the builder manages the day-to-day building and you are responsible for pricing the job, getting the quotes and organising the materials and subcontractors. The builder may do some of this, depending what you’ve agreed in the contract. People choose this option to save money by doing some of the work themselves, but it can be a huge time commitment.

You won’t necessarily save by buying the materials yourself, because even though builders add a mark-up to materials they supply, they buy at trade prices so the materials will often still be cheaper than what you can buy over the counter. However, if you are buying a house-load of materials you could negotiate a substantial discount with the supplier.

If you buy the materials yourself, any problems with quality or quantities will be your responsibility to sort out.

If you choose this sort of contract, you need to be confident that the communication between you and the builder and lines of responsibility are very clearly defined. Otherwise the job could stall if you are each waiting on the other. For example, you each thought the other was ordering the bricks and none turn up.

Making it clear

It is crucial that you and the builders who are tendering for your project are very clear about what sort of contract you want.

Most builders will probably fit in with the type of service you ask for but you’ll probably find that most have a preference, i.e. some may prefer not to work under anything but a full contract so they can keep control over the project. This could rule someone off your shortlist.

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