Part 4 of 5 – The Build Contract

This is perhaps the most talked-about contract but often the most underestimated. There are many different types of build contracts you can enter into, but the most common three for developers are the standard Master Builders contract, the NZS3910, and the NZS3915.

The Master Builders contract is great, but much better suited to independent or small builds. We feel it weights payments and terms in favour of the builder and does not provide sufficient protection for lenders. In our opinion, it is less commercially viable for developments involving property finance. We would expect to see amendments to this document for it to be in a commercially acceptable form for a funder.

The NZS3910 and NZS3915 contracts are very similar, the key difference being the requirement for an Engineer to the Contract (NZS3910:2013) and, more recently, an Independent Certifier/Contract Administrator (NZS3910:2023). These contracts include three clauses that are particularly important to lenders. These are Liquidated Damages, Retentions, and the requirement for a Performance Bond.

Liquidated Damages (LDs)
LDs is a clause in a contract that stipulates an amount of money payable for a breach or loss suffered under the contract. This is often the result of time overruns due to poor contractor performance and is therefore vital when borrowing a significant amount of money for a development — you don’t want interest costs accumulating as time drags on. With interest rates as they are, it is often easy to demonstrate an estimate of LDs far higher than a builder will accept on a commercial basis. Navigating this is important.

Retentions
Retentions are a portion of a payment withheld under a construction contract, acting as a form of security or assurance that a project will be completed and any defects remedied. These normally amount to 3–5% depending on the contract. There are important rules defined under the Construction Contracts Act that dictate how these are treated, and it is important to understand them.

Performance Bond
A performance bond is a guarantee provided — normally by the head contractor’s bank — to the developer. It is enforceable in the event of default by the contractor, and the underwriter must irrevocably pay the sum provided for by the bond. It is put in place to ensure that if a contractor fails during the build, funds are available to offset the cost of securing another party to complete the development. A performance bond is often required by a lender and normally amounts to 5% of the contract value.

A successful build contract is usually a reflection of the relationship between the parties and the preparation done prior to execution. Getting the right price, a fair allocation of risk, and a clear timeframe for completion are key aspects. This is heavily predicated on the quality of the design — specifically, the level of detail. Having a builder price from a resource consent set of drawings will undoubtedly carry more risk than pricing from a construction set. However, the advantage of having a price, builder, and contract locked in early may be a trade-off worth considering.