One of the most common questions we’re asked by builders is to explain the difference between their responsibility to guarantee their work for 10 years under the Building Act and the cover provided by a 10 year Homefirst, Certified Builders or Master Build Guarantee.

Put bluntly, if a building company is still trading then its customers can use the Building Act to enforce their rights.  However, if the company has closed down then its legal obligations under the Act can’t be enforced (because the company no longer exists), and this is why homeowners need an independent guarantee.

If the company has been closed down then its legal obligations under the Act can’t be enforced.

That’s OK, many of our builders say, we don’t plan on going bust!  Indeed, no one does.  The issue is that your customers can’t be sure you’ll be around for the next 10 years if something does go wrong.  And unfortunately some high profile cases of building companies going bust have increased the public’s concern about this. Our industry is a volatile one: statistics show that 75% of construction businesses in New Zealand will have failed within 10 years.  This could be due to many reasons, the most common are:

  • Cashflow problems
  • Lack of financial & business management skills
  • Bad debt due to a customer not paying
  • Personal issues (relationship break up, accident or illness)
  • Don’t get enough business in the door
  • Leave industry

How does an independent guarantee benefit the homeowner?
As well as fixing defects, third party builders guarantees also protect the homeowner’s deposit and guarantee to complete their project if their builder can’t, as well as covering the extra costs to do so.

They are a guarantee of the builder’s obligations under their contract.  In a recent case in Christchurch more than $1m has been paid on behalf of affected homeowners after their builder went bust, many of whom would otherwise have lost their deposit or faced increased costs to complete their homes or fix defective work.

Do builders have to provide them?
No.  The new disclosure rules that came into force in January only require you to disclose whether you can offer a guarantee, you do not have to provide one.  However, some trade associations do require their members to provide them.  Builders that are not members of a trade association but do want to provide their clients with an independent 10 year guarantee can contact Builtin and apply to become Homefirst Guarantee accredited.  There’s an assessment process and they must meet Builtin’s criteria first.

Are they insurance?
No.  An insurance contract is between two parties (the client and the insurer) and pays if certain events happen.  A builders guarantee is between three parties (the client, builder and surety) and works similarly to the way parents might act as a guarantor for their kids’ mortgage payments.  They agree to pay if their kids can’t.  The surety behind a builders guarantee agrees to meet the obligations of the builder if the builder can’t fulfil those obligations themselves (usually because the company has gone bust).  So in all cases it’s first and foremost the builder’s responsibility to meet their obligations, the guarantee stands behind them and steps up if the builder can’t.  That’s why the homeowner should always try to resolve their problems directly with their builder first, and only make a guarantee claim when that has failed.

How do they benefit builders?
There is no benefit for the builder under the terms of the guarantee itself, it only benefits homeowners if their builder lets them down.  However, as more information is available to the public through mandatory checklists and disclosures demand for independent guarantees is likely to increase, so builders who offer them will benefit.

Overseas examples
In many Australian states it is a legal requirement for builders to provide what they call a home warranty for every project, and they can’t be licensed without first being approved to provide warranty cover. In the UK more than 80% of all new homes are covered by a third party 10 year guarantee, although the scheme there is optional.  The current approach in New Zealand is to encourage the building public to become more informed and choose a builder who can provide an independent 10 year guarantee.

Table of the protection available through third party guarantees and implied or express warranties in law

Building Act Warranties Consumer Guarantees Act Third Party Guarantees
Builder must be still trading Builder must be still trading Builder is no longer trading
No protection for deposits or extra completion costs No protection for deposits or extra completion costs Refund lost deposits or pay extra costs to complete a project if the builder defaults
You agree that: Does not apply to buildings and building materials, but does apply to services. The law requires that your services will be: Provide the following benefits to homeowners if their builder is unable to fulfil their contractual obligations:
(subject to the terms and conditions of the policy)
The building work will be done properly, competently, and in accordance with the plans and specifications Performed with reasonable care and skill Refund a deposit if building work has not commenced
All the materials used will be suitable and, unless otherwise stated in the contract, new Fit for the particular purpose they were supplied for Complete a contract and absorb extra costs to complete that contract
The building work will be carried out in accordance with all law and requirements, including the Building Act and Regulations (including the Building Code) Completed within a reasonable time Fix non-structural defects within the first two years
The building work will be carried out with reasonable care and skill and completed within the time specified, or a reasonable time if no time is stated A reasonable price, if no price or pricing formula has been previously agreed Fix structural defects including weathertightness for up to 10 years
The household unit will be suitable for occupation at the end of the work You must fix any problem you’re responsible for within a reasonable timeframe.  If you can’t fix the problem the consumer can: Benefits can be transferred to subsequent owners
That if the contract states any particular outcome and the owner relies on the skill and judgment of the contractor to achieve it, the building work and the materials will be fit for purpose and be of a nature or quality suitable to achieve that result Claim compensation for any drop in the value of the product or service
You must “put it right” for the first 12 months (or prove you are not responsible) Cancel the service contract, pay for any satisfactory work already done, and get someone else to finish the repairs
You must “put it right” for up to 10 years (the client must prove you are responsible) Consumers may also claim for any reasonably foreseeable extra loss that results from the initial problem

In a nutshell
Third party builders guarantees provide benefits to homeowners that aren’t available under the law, such as for loss of deposit and extra completion costs.  They also ensure that homeowners have some protection when they can’t enforce their rights under the Building Act or Consumer Guarantees Act because their builder is no longer around.

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