Registered Master Builders Residential Building Contract – is it a “fixed price” contract?

There are cost certainty benefits in engaging a builder under a lump sum / fixed price building contract.  It can be difficult to know the final cost of residential building work and a fixed price contract generally means the builder takes on the risk of increased costs.  Contrast this to a charge up contract which moves that risk from the builder to you. 

The Registered Master Builders have their own form of building contract and the current version, the RCB1 – 2018 (RCB1) allows for either a lump sum/fixed price or a charge up price.  But is the RCB1 lump sum a true fixed price to the extent that the stated lump sum amount is the only amount you will be required to pay?

Adjustments = your cost

RBC1 identifies many unknown but potential costs as “Adjustments”, which under the unamended provisions of RBC1, are required to be paid by you. 

One of your main obligations under RBC1 is to pay the “Contract Price” to the builder.  The Contract Price in RBC1 is the fixed price specified, but the definition extends to include any “Adjustments” that arise under the contract.  Therefore, if any additional costs are Adjustments, then the Contract Price will increase to include those additional costs, so strictly speaking, the price specified in the contract details of an RCB1contract is not a fixed price and is subject to change.

Variations to the building work give rise to Adjustments

RBC1 lists circumstances which would give rise to a variation to the agreed building work.  A variation is any change to the agreed building work (eg. requiring additional work to be done or omitting work).  Variations may arise where:

·       you request a change and the builder agrees to that change

·       the builder considers that work or materials not specified in the contract are reasonably required to complete the building work

·       a change is required by the council or for the building work to comply with the building code

·       a change is required due to changes in law

·       the builder can no longer obtain certain building materials which are specified in the contract

·       the builder encounters unforeseen ground conditions or land subsidence / inadequate fill.

RBC1 provides that if there is a variation to the building work then any associated additional costs are Adjustments and therefore are at your cost, not the builder’s. 

Adjustments caused by Delay

The extension of time provisions in RBC1 provide very wide circumstances which entitle the builder to an extension of time to complete of the building work.  Extension of time provisions in building contracts are not only a requirement of Building Regulations, but also important for the builder to ensure it is not in breach of the contract when a delay occurs and is outside of the builder’s control.  A topical example is the delay caused by Covid-19, such as, difficulties in obtaining certain materials (especially from overseas) and lockdowns.

RBC1 provides that if the builder is entitled to an extension of time, the builder is also entitled to an Adjustment for the builder’s additional costs.  If delay is caused by a lockdown, the builder’s additional costs may include insurance costs, office rental and other business costs, employee costs, and onsite additional costs such as fencing and security.

Provisional Sums / Prime Cost Sums

Provisional Sums and/or Prime Cost Sums contractual provisions provide a mechanism for the builder to transfer the risk of additional cost to you when the builder is unable or unwilling to take the risk of fixing certain costs in the building contract.  These sums are preliminary allowances which are later substituted for the actual costs (plus a margin for the builder) when the work is carried out.  An example of a prime cost sum might be the amount of $10,000 specified for driveway works.  This sum is included in the total Contract Price.  When the driveway works are undertaken, if the cost (plus margin) is $13,000, then the Contract Price will increase by a further $3,000.

To reduce the risk of increased costs arising from the use of Provisional Sums and/or Prime Cost Sums, you could look to reduce the number of such sums proposed.  Where it is reasonable to include such sums, do your own due diligence on what might be a reasonable value for a specific sum.  For example, and depending on the size and type of driveway, a $2,000 sum would likely be a completely unreasonable value.  A reasonable value might be closer to $10,000 - $15,000.

Other circumstances giving rise to Adjustments

RBC1 also provides for other circumstances which may give rise to Adjustments payable by you.  These include:

·       if the builder is entitled to suspend the building work due to your failure to pay,

·       fluctuations in the cost of materials or the builder’s plant and equipment,

·       costs incurred due to any part of the building work that you have carried out or contracted to a third-party tradesperson.

Your options

A well drafted building contract will allocate potential additional costs (Adjustments under RCB1) to the party who is best placed to bear them.  RBC1 allocates many of these costs to you, rather than the builder.  Although you may be better placed to bear many of these costs, there are some that may, in the circumstances, be more appropriate for the builder to pay, for example, the builder’s costs arising from Covid-19 lockdowns or bad weather, and cost fluctuations.  Changing these allocations of risk can be done by simple amendments to RCB1.

The risk of an increase to a fixed price due to the operation of Provisional Sums and/or Prime Costs Sums may also be able to be more appropriately allocated depending on each of the values and the reasons for including them.

We are experienced in the review and drafting of residential building contracts, particularly RCB1, and would be happy to assist you with the review and/or drafting requirements of your building contract.

Tom Evatt & Co have written this article solely for information purposes and it is not a substitution for specific legal advice.  All building contracts are different, and you should seek legal advice before signing any building contract.  Please contact Prue Miller for further assistance.

E: Prue.miller@tomevatt.co.nz P: 021 023 80405