Building in an Economic Downturn

15 June 2023

Building companies collapsing during economic downturns is nothing new in New Zealand. It seems the rate of collapse can often be an economic indicator in and of itself. We have also seen this financial uncertainly not only in a commercial construction context but flowing into home and tiny house builders as well. These collapses have resulted in customers being left with half built projects and being left out of pocket for work remaining, or worse, losing significant deposits paid well ahead of time.

If you are in the market to engage a builder or construction company, below are some things to think about when signing up for work to be undertaken:

  • Due diligence – have you checked out the builder’s background, spoken to other customers, and checked their credit history? Does the builder have a history of
    completing jobs on time and on budget? How long have they been trading for and have
    they weathered previous downturns? Have they previously been involved in an
    insolvency process?
  • Deposit – where is your deposit held? How far in advance of construction commencing are you required to pay the deposit? Is the deposit paid into a trust account so it isn’t available for use by the builder to pay other bills? When is the deposit released to the builder and how can it be used?
  • Payment – are you paying on monthly invoice during the course of construction, or in one lump sum at the end (turn key contract)? Is the builder invoicing in advance or in arrears?
  • Ownership – at what point do you own the work being undertaken? Is it on payment of each invoice for the work done or is it only once all amounts have been paid under the whole contract?
  • Security – if your assets are in the possession of the builder (for example a half constructed tiny home), do you have a registered security interest in place to protect your interest?
  • Insurance – is the builder properly insured for work being undertaken? Do they have contract works as well as public liability insurance? Does the builder’s insurance cover assets that you own while in their possession?
  • Guarantees – if you are receiving a third party guarantee, are you covered for a loss of deposit or costs to engage a new builder if your builder collapses? Are you comfortable with the exclusions, and items that are not covered?
  • Final payment – are you entitled to inspect the work, and receive any code compliance certificates prior to making any final payment? If defects are discovered after you have made final payment, what are the arrangements for the builder to return and fix those defects? Does any third party guarantee cover costs to resolve these defects if your builder has collapsed?
  • Disputes – does the contract include an appropriate and easily understood disputes resolution process?
  • Exit – can you terminate the relationship with the builder if they get into financial difficulties? We note that changing to another builder may be costly and time consuming, however, there may be few alternatives available if your initial builder does not have the financial resources available to complete the work.

The above areas are just some of the ways that a customer can protect their position through the building process. Often a builder’s terms and conditions are heavily in their favour, or are deficient in matters related to consumer protection. As a result, we recommend a thorough review of the terms and conditions to ensure that key risks are understood prior to proceeding with a contract.

If you require assistance, please let us know we are happy to assist.

Chris Steenstra and Tom Corkill are part of our Corporate & Commercial team at Norris Ward McKinnon.