Fixed Price Contracts and Charge-Up Contracts

Embarking on a building project in New Zealand, whether it's your first home or a significant renovation, is an exciting but often complex undertaking. One of the most critical decisions you'll face is selecting the right type of building contract. Two common options in NZ are fixed price contracts and charge-up contracts. Understanding the nuances of each is essential for managing your budget, timelines, and stress levels. This comprehensive guide will break down these contract types, explore their benefits and drawbacks specifically for New Zealand homeowners, and provide you with the knowledge to make an informed choice.

Choosing the right building contract in New Zealand can significantly impact the success and stress levels of your project. Get it right, and you'll have a clearer path to your dream home or renovation. Get it wrong, and you could face unexpected costs, delays, and disputes. This guide provides a clear and concise breakdown of fixed price and charge-up contracts, tailored to the unique context of the New Zealand building industry.

Table of Contents:

1. What is a Fixed Price Contract? (Lump Sum Contract)

2. What is a Charge-Up Contract? (Cost-Plus or Time-and-Materials Contract)

3. Fixed Price vs. Charge-Up: Key Differences and Implications for NZ Homeowners

4. Choosing the Right Contract for Your New Zealand Project

5. Real-Life Scenarios in New Zealand

6. Frequently Asked Questions (FAQ) about NZ Building Contracts

7. Conclusion

What is a Fixed Price Contract? (Lump Sum Contract)

A fixed price contract, also known as a lump sum agreement, is a straightforward arrangement where your builder agrees to complete the entire project as defined in the contract for a predetermined, set price. This single price encompasses all aspects of the build, including labour, materials, subcontractors, and the builder's overhead and profit.

• Benefits of Fixed Price Contracts:

  • Budget Certainty: The most significant benefit is knowing the total cost upfront. This simplifies financial planning and makes it easier to secure bank financing in New Zealand.

  • Risk Management for You: The builder carries the risk of cost overruns. If material prices increase or the project takes longer than anticipated (within the original scope), the builder absorbs those extra costs. This incentivizes efficiency.

  • Simplicity and Predictability: Fixed price contracts are generally easier to understand, making them a popular choice for first-time homeowners or those with limited construction knowledge in NZ.

    
    

• Drawbacks of Fixed Price Contracts:

  • Limited Flexibility: Making changes (variations) after the contract is signed can be costly and time-consuming. Unforeseen issues common in NZ, such as unexpected ground conditions or changes in council requirements, can lead to significant variation costs.

  • Potential for Higher Initial Costs: Builders may include a contingency buffer in their fixed price to protect themselves against potential cost increases. This means the initial quote might be higher compared to a charge-up contract.

  • Risk of Disputes: Ambiguities in the scope of work can lead to disagreements about what's included in the fixed price, potentially causing stress and delays. Clear and detailed plans are crucial.

    
    

• Understanding Provisional Costs (PC) and Provisional Sums (PS) in Fixed Price Contracts

  While fixed price contracts aim for a set total cost, they can sometimes include Provisional Costs (PC) and Provisional Sums (PS) for specific elements of the project where the exact cost or scope isn't fully defined at the time of signing the contract.

  • Provisional Sums (PS): These are allowances included in the fixed price for specific items of work or materials where the selection or final cost is not yet determined. Common examples in a New Zealand build could include the final selection of kitchen appliances, bathroom fixtures, or landscaping elements. The fixed price contract will include an estimated amount for these items, and the final cost will be adjusted based on your selections.

  • Provisional Costs (PC): These typically relate to work where the extent or nature is uncertain. For instance, if your New Zealand property has potential for unforeseen groundworks, a PC might be included to cover a potential range of costs for this aspect. The final cost will be based on the actual work required.

    
    

  It's crucial to understand that while the overall contract is fixed, the amounts allocated as PS and PC are estimates. When these items are finalized, the contract price will be adjusted accordingly through a variation. Clear documentation and communication regarding PS and PC are essential to avoid misunderstandings.

  
  

• For a more in-depth explanation of Provisional Costs and Provisional Sums, you can refer to our detailed blog post here:PS Sum and PC Sum in Building Construction

  
  
  
  

• New Zealand Context: Bank Financing and Legal Considerations:

  • New Zealand banks often prefer fixed price contracts due to their predictability, making it easier for homeowners to secure mortgages. However, if unforeseen issues arise requiring additional funds, renegotiating with the bank can cause delays.

    Under the Construction Contracts Act 2002, fixed price contracts in NZ must include clear payment schedules, processes for variations, and dispute resolution mechanisms. The Fair Trading Act 1986 and the Consumer Guarantees Act 1993 provide crucial protection against misleading information and substandard workmanship.

    
    

What is a Charge-Up Contract? (Cost-Plus or Time-and-Materials Contract)

A charge-up contract, also known as a cost-plus or time-and-materials contract, involves you paying the actual costs incurred by the builder for labour, materials, and other expenses, plus an agreed-upon fee or percentage for their margin (profit and overhead). builder's margin.

• Benefits of Charge-Up Contracts:

  • High Flexibility: Charge-up contracts are ideal for projects where the scope might evolve, such as complex renovations of older New Zealand homes where unforeseen structural issues are common. Changes can be accommodated more easily without complex renegotiations.

  • Greater Transparency: You have the right to see the actual costs of the project, fostering trust and allowing you to track spending closely.

  • Potential for Cost Savings (in some cases): If the project is completed efficiently and without significant unforeseen issues, the total cost could potentially be lower than a fixed price contract that includes a large contingency.

  • Focus on Quality: Builders are often incentivized to use quality materials and skilled labour as their profit is usually a percentage of the total cost.

    
    

• Drawbacks of Charge-Up Contracts:

  • Budget Uncertainty: The most significant drawback is that the final cost is unknown until the project's completion, making financial planning more challenging.

  • Potential for Cost Overruns: Without strict cost controls and diligent oversight, costs can escalate quickly.

  • Significant Administrative Burden: Charge-up contracts require detailed record-keeping, invoicing, and potentially more of your time to review and approve costs.

  • Requires Strong Trust: A high level of trust between you and your builder is crucial, as you are relying on their honesty and efficiency in managing costs.

    
    

• New Zealand Context: Transparency and Trust:

  • In New Zealand, where trust and open communication are highly valued, charge-up contracts can be successful if you have a strong, established relationship with your builder and a clear understanding of their costing processes.

    It is vital that the contract explicitly outlines the builder's profit margin (whether a fixed fee or a percentage), how labour costs are calculated (hourly rates), and how material costs will be documented and presented (e.g., copies of invoices). Regular communication and detailed cost tracking are essential.

  • At Kiwi Built we use Buildertrend to monitor budgets, and show our client everything that they need to know, check it out HERE!

    
    
    
    

Fixed Price vs. Charge-Up: Key Differences and Implications for NZ Homeowners:

Feature	Fixed Price Contract	Charge-Up Contract	Implications for NZ Homeowners
Budget	Certain	Uncertain	Fixed price aids bank financing but requires accurate initial scope. Charge-up demands careful budgeting and potential for unexpected costs.
Flexibility	Limited	High	Fixed price can lead to costly variations. Charge-up allows easier adaptation to changes common in renovations or complex builds.
Risk	Contractor	Client	Fixed price protects against cost overruns (within scope). Charge-up requires the client to manage cost risks
Transparency	Lower	Higher	Charge-up offers more insight into spending, fostering trust if managed well. Fixed price relies on the builder's efficiency.
Bank Preference (NZ)	High	Low	Banks often prefer the budget certainty of fixed price contracts. Charge-up may require more justification and stricter financial oversight.
Legal Considerations (NZ)	Construction Contracts Act 2002, Fair Trading Act 1986, Consumer Guarantees Act 1993.	Construction Contracts Act 2002, Fair Trading Act 1986, Consumer Guarantees Act 1993.	Both contract types are subject to NZ consumer protection laws and the requirements for payment schedules and dispute resolution.

Choosing the Right Contract for Your New Zealand Project:

• Choosing between a fixed price and charge-up contract isn't a one-size-fits-all decision. Consider these factors specific to your New Zealand project:

  
  

  • Project Complexity and Scope: For straightforward new builds with well-defined plans, a fixed price contract can offer peace of mind. Complex renovations or projects with uncertain scopes may be better suited to a charge-up contract.

  • Your Budget and Risk Tolerance: If budget certainty is paramount and you prefer to avoid the risk of cost overruns, a fixed price contract might be the way to go (ensure a reasonable contingency is included). If you're comfortable with potential fluctuations and value flexibility, a charge-up contract could work.

  • Your Relationship with the Contractor: A high level of trust and open communication are crucial for a successful charge-up contract. If you have a long-standing, positive relationship with your builder, this might be a viable option.

  • Financing Options and Bank Requirements: Discuss your contract options with your bank early on, as they may have a preference.

  • The Time Scale of the Project: Longer projects might be more susceptible to unforeseen price fluctuations, which could impact both contract types differently.

    
    

• Essential Legal and Financial Advice for NZ Building Contracts

  
  

  Before signing any building contract in New Zealand, it's crucial to:

  • Consult with a New Zealand construction lawyer: They can review the contract to ensure it complies with local laws and protects your interests. Pay close attention to clauses regarding variations, payment schedules, and dispute resolution.

  • Seek advice from a financial advisor: Discuss your budget, financing options, and the potential financial implications of each contract type.

Real-Life Scenarios in New Zealand:

• Scenario 1: Fixed Price for a Standard Home Build in Auckland: A young family building their first home in a new subdivision opts for a fixed price contract. They appreciate the budget certainty, which aligns with their bank financing. Detailed plans and specifications minimize the risk of costly variations.

  Scenario 2: Charge-Up for a Complex Heritage Home Renovation in Wellington: A homeowner undertaking a significant renovation of a character villa chooses a charge-up contract. The unpredictable nature of working with an older home, including potential structural issues and the desire for bespoke finishes, makes flexibility essential. They maintain close communication with their builder and review costs regularly.

  
  

Frequently Asked Questions (FAQ) about NZ Building Contracts

• What happens if we want to make changes to a fixed price contract? Changes (variations) will likely incur additional costs and potentially extend the project timeline. The contract should outline the process for managing variations.

• How do banks in New Zealand typically view charge-up contracts? Banks are often more cautious with charge-up contracts due to the lack of a guaranteed final price. They may require more detailed cost projections and stricter loan conditions.

• What level of detail should be included in a charge-up contract's cost tracking? The contract should specify how labour hours are recorded, how materials are invoiced (ideally with copies of supplier invoices), and how the builder's margin is calculated and applied.

• Are there standard forms for building contracts in New Zealand? Yes, there are standard form contracts available (e.g., from Master Builders Association or NZIA). It's still crucial to have these reviewed by your lawyer.

• What are the key things to look for in a building contract in NZ? Clear scope of works, detailed plans and specifications, payment schedule, process for variations, dispute resolution mechanisms, insurance details, and clauses related to delays and defects.

Conclusion: Choosing the Best Contract for Your NZ Building Journey

The decision between a fixed price and a charge-up contract for your New Zealand building project hinges on your individual circumstances, risk tolerance, the complexity of your project, and your relationship with your builder. By carefully considering the benefits and drawbacks of each contract type within the New Zealand context, seeking professional legal and financial advice, and understanding your own priorities, you can make an informed decision that sets you on the path to a successful and stress-minimized building experience..