A contract is a legally binding agreement entered into by two or more parties. The agreement is to do (or not do) a particular thing, and it describes the rights and obligations of all parties. A contract can be written or verbal.
Tip
- The contractor is the party hired to perform work or provide services.
- The principal is the party engaging the contractor.
Since the contract is legally binding if either party fails to fulfil their obligations, the other party can take legal action to enforce the contract or seek remedies. For this reason, it is important that both parties understand exactly what is being agreed upon.
The following are required for a contract to be valid. Click on each of the headings below to display the explanations.
- An offer is a proposal to enter into a contractual arrangement.
- The proposed terms for the contract must be described. These terms may be negotiated between the parties.
- For example, a quote to perform a renovation task is an offer. The terms will include the tasks to perform and the costs.
- The second party needs to accept the contract.
- They need to accept all negotiated terms.
- For example: accepting a quote.
- Something of value must be exchanged between the parties. This is referred to as consideration.
- For example, payment for the job is an example of consideration.
- Both parties must intend to be bound by the contractual agreement.
- When both parties sign a contract, they are signalling their intention to be bound.
- The contract terms must be clear to both parties. This is referred to as certainty.
- Both parties must have the mental capacity to understand the terms they are agreeing to.
Tip
The Glossary at the end of this module contains definitions of contract terms that may be useful.
If a construction project will cost $30,000 or more, a written contract is required between the client and the construction company. This is mandated under the Building Act 2004.
Residential clients with projects with a value of less than $30,000 can also request a contract. There are multiple benefits to having a written contract.
- A contract provides clarity to all parties by defining expectations and stating obligations.
- Contracts provide legal protection to all parties by defining responsibilities. If disputes arise, the contract will be invaluable in determining whether either party has failed to uphold their obligations.
- Payment terms are formalised, providing financial security.
- Timeframes will be formalised.
- The use of subcontractors will be detailed.
- Warranties or guarantees will be detailed.
- Contracts provide a record of the planned work.
- Contracts provide project transparency.
Client Contract Types
A range of contract types are available depending on the role of the construction company.
Preliminary Services Contract
This type of contract covers the initial stages of a construction project before the main construction work begins. Steps in this phase may include:
- feasibility studies
- design work
- initial stakeholder consultation
- quantity surveying to determine approximate costs
- consent application.
The preliminary services contract defines the scope of this initial work. It provides protection to the parties providing services and defines payment terms.
Design-Build Contract
This contract is used when a single organisation is responsible for both the design and the construction. Design-build contracts are beneficial for clients who want to deal with one organisation.
Build-Only Contract
With a build-only contract, the owner is responsible for the project design. The builder is contracted to construct the building based on the supplied design. ‘Build-only contracts are the most commonly used form of commercial construction contract in the NZ market, particularly for small to medium-sized commercial projects’ (Ref: Dentons, Build-only and Design-build construction).
Construction Management Contracts
This contract type applies when the construction company is managing the project, rather than undertaking the building work. All physical work is undertaken by subcontractors while the main contractor performs scheduling and other administrative tasks.
Standard Contracts
Standard contracts are templates created by professional organisations. They fulfil the legislative requirements of the industry and can be customised as required.
New Zealand Standards
New Zealand Standards (NZS) produces standard form contracts that are commonly used in the construction industry. These standard contracts are written to suit New Zealand’s building legislation and construction industry. They are designed to balance the needs of the client and the construction company.
It is important that you are familiar with the most commonly used standard form contracts.
- NZS 3916:2013 Conditions of contract for building and civil engineering – Design and construct. This standard guides the preparation of design-build contracts.
- NZS 3910:2023 Conditions of contract for building and civil engineering construction. This standard guides the preparation of build-only contracts.
- NZS 3917:2013 Conditions of contract for building and civil engineering - Fixed term. This standard is used when the contract is intended to run for a specific time period. This is different from the other standard contracts where the contract is designed to run until the agreed work has been completed.
Tip
The number after the colon shows the date the standard was last revised. E.g. 3910:2023 was last revised in 2023.
BuildSafe
BuildSafe acts as an escrow agent for builders and clients. This means they hold the client’s funds until both parties have fulfilled all their contractual obligations. The escrow system is designed to protect the financial security of both parties.
BuildSafe has also produced free contract documents for residential projects.
- BuildRight BCC:2016 is for construction contracts.
- BuildRight BCS:2016 is for subcontracting.
This standard contract can be viewed by clicking here: BuildRight BCS:2016.
Master Builders Association
Master Builders Association provides accreditation to builders who meet their quality criteria. A client who hires an accredited Master Builder can be reassured they are working with a qualified professional.
Master Builders supply a building contract that can only be used by accredited providers. The contract RBC1 - 2018 is for new builds only.
The standard contact can be viewed by clicking here: Master Builder RBC1 – 2018.
New Zealand Certified Builders (NZCB)
NZCB is a builder association that offers membership to builders who hold a recognised industry qualification. The organisation provides support to their members while also assuring clients of the high skill level of NZCB builders.
NZCB provides a range of contracts for members to use. Contract types include:
- Preliminary Services
- Small Works and Alterations
- Cost & Mark-Up
- Labour Only.
Pricing Types
Fixed-Price Contracts
Also known as a lump sum contract. The contractor agrees to complete the project for a predetermined price. If there are cost overruns, these are borne by the construction company. The construction company will build a contingency into the contracted price. This is an additional amount of money designed to cover financial overruns.
Cost-Plus Contract
Also referred to as a cost and markup contract or cost-reimbursable contract. With this contract type, the client pays the actual project costs plus a markup fee to the contractor. This markup might be a fixed fee or a percentage of the total costs.
Time and Materials (T&M) Contract
Rather than agreeing on a price for the whole project, a time and materials contract specifies an hourly rate for the contractor. The client is then billed for the number of hours worked. The contractor also bills the client for the materials used, with an agreed markup. A T&M contract provides a high level of transparency, as the client can see exactly how many hours have been spent on the project.
Assessment Tip
You will be required to research and answer questions on contract types when you get to Assessment 01A1. You may want to prepare by making sure you are familiar with:
- Contract pricing types including:
- fixed-price
- cost-plus
- time and materials.
- Build contract types including:
- design-build
- build-only
- preliminary services contracts.
Along with clients, people employed to perform construction project work will also have contracts. These are formal agreements between the employer (the construction company) and the employee (worker, contractor, professional). These contracts will specify the following:
- role description
- responsibilities, liabilities and limitations
- duration of the contracted work
- work hours and schedules
- remuneration details
- reporting structure
- performance expectations
- disputes resolution.
Subcontractors will have a contractual agreement with the main contractor rather than with the project owner.
Professional Service Agreements (PSA)
Professionals such as engineers and architects are engaged to provide a specific, time-limited service. They may enter into a professional service agreement which is a specific type of contract. A PSA outlines the terms and conditions under which the professional services will be provided. A PSA will contain:
- scope of services
- duration and deadlines
- quality expectations and standards to be adhered to
- remuneration details
- information on liability and indemnity
- information on who retains the intellectual property of the produced work.
A PSA tends to be specifically tailored to the professional service it is supplied to, precisely detailing performance expectations. As with all other contracts, a PSA is legally binding.
A large construction project will require the creation of multiple contracts. Obligation management refers to the process of ensuring that each contractor is meeting their obligations and responsibilities as defined in the contract.
Contractual Obligations, Liabilities and Limitations
- Obligations are the specific duties and legal responsibilities that the contractor agrees to perform as part of the contract. For example, a plumber is obligated to install the bathroom fittings as per the project specifications.
- Liabilities are the legal consequences of failing to complete the contractual obligations. For example, a plumber may have to pay damages for late performance or poor workmanship.
- Limitations are provisions in the contract that define boundaries of responsibilities for the contractor. For example, the plumber is only required to perform the work described in the contract.
Legal Obligations
Any building project needs to adhere to a range of legislative requirements. These requirements protect employees working on the site and ensure that the final building complies with standards as defined by New Zealand law.
Legal obligations that protect the employee:
- Health and safety: as per the Health and Safety at Work Act (2015) employers need to protect the employees while working on the project. Employees need to take reasonable care of their own health and safety, following training and instructions.
- Construction Contracts Act (2002): this Act governs the payment of contractors, the withholding of retention money and dispute resolution in the construction industry.
- Employment law: contracts must adhere to employment legislation such as the Employment Relations Act 2002, delivering negotiated remuneration and providing mandated work breaks and leave entitlements.
- Insurance: employees may need to take out insurance policies such as public liability insurance and professional indemnity insurance to protect themselves against potential claims.
- Legal obligations that protect the building process
- Building consents and permits: all the relevant consents and permits need to be obtained before work begins. These may include building consents and resource consents.
- Building Code: any construction needs to adhere to the New Zealand Building Code. This specifies performance standards that all building work must meet. It includes structural stability, moisture control, fire protection and energy efficiency.
- Licensing and registration: contractors and subcontractors may need to hold specific licenses and registrations that indicate that they have the required skills and knowledge to complete their contracted work.
- Environmental compliance requirements: employees need to adhere to all environmental obligations to protect the site and surrounding environment.
Task Obligations
Task obligations are the specific tasks that each contractor has been hired to perform.
A construction contract will contain a scope of work section. This will provide a detailed description of the work that needs to be performed. In a small project, this description might be included in the contract itself. In a large project, this scope might be described in an addendum to the contract.
These task obligations form the basis of the stakeholder analysis documentation. The tasks can be extracted and added to the task lists. Dates are added so that contractual progress can be measured.
Activity
Click on the link to open an example of a contract for plumbing services. The task list below has been derived from the contract. Approximate dates have been added.
| Task No. | Task Description | Start Date | End Date | Progress |
|---|---|---|---|---|
| 1 | Initial site inspection and assessment | 17-06-2024 | 17-06-2024 | Complete |
| 2 | Obtain necessary permits | 18-06-2024 | 21-06-2024 | Complete |
| 3 | Install main water supply line | 24-06-2024 | 25-06-2024 | In progress |
| 4 | Install drainage system | 26-07-2024 | 27-07-2024 | Upcoming |
| 5 | Install pipework for bathrooms | 28-07-2024 | 02-07-2024 | Upcoming |
| 6 | Install bathroom fixtures (toilets, sinks, etc.) | 03-07-2024 | 04-07-2024 | Upcoming |
| 7 | Connect plumbing to main water and sewer lines | 05-07-2024 | 05-07-2024 | Upcoming |
| 8 | Test all installations for leaks and functionality | 06-07-2024 | 06-07-2024 | Upcoming |
| 9 | Final inspection and client walkthrough | 07-07-2024 | 07-07-2024 | Upcoming |
| 10 | Clean-up and removal of any debris | 08-07-2024 | 08-07-2024 | Upcoming |
Contractual Liabilities
Liabilities occur when an obligation is not adhered to.
- Defects liability: the contractor may be required to repair any defects within a specific time period at their own expense.
- Delay liability: the contractor may have to pay damages for delays that they are responsible for.
- Compliance liability: the contractor is liable for ensuring that work complies with all relevant standards.
- Health and safety liability: if a contractor does not maintain a safe work environment, they may be liable for any health and safety incidents.
- Environmental liability: the contractor may be liable if they act in such a way as to threaten the environment, for example, allowing dangerous substances to escape.
- Insurance liability: insurance can protect contractors, so failure to take out the mandated insurance can leave a contractor liable.
Reading
Click on the link to read an article on a failed car park building.
Note the potential repercussions:
- Legal proceedings are being brought against the engineering company that designed the building.
- A complaint about the conduct of the engineers has been lodged with Engineering New Zealand (a professional body).
If the complaints against the engineers were upheld they may face:
- Expulsion from the professional body.
- Loss of their registration.
- A fine of up to $5000.
- An order to contribute to the inquiry cost.
- Public naming.
Contractual Limitations
Limitations provide clarity on what is and is not included.
- Scope: a clause may state that the contractor’s obligations are limited to the work described in Schedule A of the contract.
- Liability limitations: although usually liable for damage caused by negligence, liability for damage caused by design flaws or acts of third parties may be excluded.
- Time limitations: the contractor must adhere to the project schedule unless delays are caused by a change of scope or unforeseen circumstances.
- Budget limitations: where materials are being procured, the contractor must not exceed the proscribed budget without consent.
- Limitation periods: there will be a limited period (e.g. 12 or 24 months) within which defects must be rectified by the contractor at their expense.
Assessment Tip
You be required to conduct some research on contractual obligations and liabilities as part of Assessment 01A1. Now could be an opportunity to try out some AI research tools such as ChatGTP.
Management
Contract Creation and Clarification
Contract management begins with the creation of the contracts by Human Resources (HR) staff. HR will collaborate with the project manager to determine the obligations, liabilities and limitations that need to be documented in each contract.
One of the benefits of having a robust contract is that stakeholder’s obligations and responsibilities are clearly defined. However, contracts tend to be large, complex documents containing legal jargon. Obligations, liabilities, and limitations, along with other contractual components, may need to be clarified for the contractor. The contractor can only sign the contract when they fully understand the contractual obligations. The importance of adhering to all contract terms must be emphasised.
Adherence to Terms
Once the contracted work has begun, adherence to the contractual terms should be monitored. Daily construction reports can be used to tick off the task requirements derived from the contract. This way, a deviation from the task requirements can be identified early. For example, if the contractor is behind schedule, they can be communicated with. The cause of the delay may easily be identified and remedied. If it looks as though the contractor is going to be unable to fulfil a part of the contract, alternatives can be explored in a timely manner.
It is vital that project issues are identified early. For this reason, it is important that task requirements are checked off in a timely manner throughout the life of the contract.
Compliance with the agreed quality and regulatory requirements and contract work conditions may also be reviewed. For example, a subcontractor may have an agreement that prohibits work within certain hours. Adherence to this condition may need to be monitored and corrective action taken if required. Any misunderstandings about contractual requirements can be clarified.
Regular engagement with contractors is essential, as described in the SEP. These communications provide an opportunity to review contractual requirements and discuss any issues.
Liabilities
Even when the project work has been completed, the contractor may still have contractual liabilities that need to be monitored. If the work has been completed late, the contractor may be required to pay a penalty. If work has been found to be faulty within the specified limitation period, the contractor will need to remedy it.
Contract Changes
Changes occur in most construction projects.
- The client may request changes in design or materials.
- There may be delays that extend the time that a contractor is required to work.
- Unexpected site conditions, such as soil issues, may force design changes.
These changes may force changes to the contract specifications or duration. Any contract changes need to be negotiated with the contractor and documented. Significant changes in contractual requirements may require pay rates and other benefits to be renegotiated.
Consolidation Activity
This activity encourages you to consolidate your knowledge from the course so far.
Assessment 01A1
You are now ready to complete and submit Assessment 01A1.
Note that this assessment is not due until the end of the module, so there is no need to rush. However, starting the assessment at this point means the content is fresh in your mind and you will have plenty of time to refine your answers.
If you have any questions before you start your assessment, add them to the Topic questions thread in the forum.
Karawhiua! Give it all you’ve got!
