Terms of Trade for Building Companies.

Did you know that having a well written Terms of Trade can help a company limit its risk and maintain its profit? Did you also know that the Terms of Trade for the building and construction sector have different requirements to the standard Terms of Trade? No? Well, read on...

This article explores Terms of Trade specifically for companies working in, or supplying to the building and construction industry. Here we discuss the the key requirements and components of a thorough Terms of Trade to assist companies in limiting their risk and maintaining profit. From here you can have your own Terms of Trade reviewed to gain confidence that the areas discussed are appropriately covered.

Mandatory requirements of residential building contracts: 

The building and construction sector has industry specific legislation that imposes mandatory contractual requirements on its participants. This means that the Terms of Trade for companies in this sector cannot just be standard Terms of Trade used for other industries. According to the relevant legislation, a residential building contract is a contract under which the building contractor agrees with the client to do building work in relation to a household unit. The client does not have to be the owner or occupier of the house.

All residential building companies must follow certain documentation requirements. These include:

• Pre-contract disclosure.
• A written contract, with a minimum of 16 specified requirements completed.
• Completion information.
• As well as building companies themselves, these mandatory requirements apply to:
• All trades, manufacturers and suppliers to the building industry.
• Related services like kitchen, bathroom and heating installers.
• Building removal companies.
• House and land packages.

The mandatory requirements do not apply to contracts of less than $26,000 plus GST ($30,000 incl. GST). However, it can often be advantageous for the builder or trades person to provide a contract anyway.

Implied terms:

In addition to the mandatory requirements referred to above, many building companies are not aware that there are certain implied terms that are read into residential building contracts. These include:

• It is the contractor’s obligation to obtain building and other consents and code compliance certificates.
• Variations must be in writing.
• There are implied terms around timing of payments.

It can be highly beneficial for the building company to specifically override these implied terms in their Terms of Trade. For example by stating: that it is the client’s obligation to obtain the building consents and code compliance certificates; that not all variations need to be in writing such as for emergency repairs; and that the implied term of 20 days for payment is reduced to, for example 7 days.

Retentions and security:

• In relation to the retentions regime in the Construction Contracts Act, Terms of Trade should state that:
• All retentions held by clients should be held in a separate bank account.
• The contractor has the right to access information in regard to the retention's at certain times.
• This will help alert the company to any improper use of retention's held from them.

Another important matter to include in Terms of Trade is a well drafted Personal Property Securities Act clause. The building industry has a higher risk of collapse than most, and the majority of participants will at some stage encounter a client or contractor that encounters financial difficulty. A well drafted clause can give the building company priority over even the bank and the IRD in certain circumstances.