When it comes to residential construction projects in New Zealand, it’s common practice for builders to request a deposit before works commence. Typically ranging from 5% to 10% of the total contract value, these deposits serve as an initial payment claimed by residential builders. However, some builders have requested deposits as high as 50%, a practice many consider unreasonable and one that exposes homeowners to unnecessary risk.
The Builder’s Perspective: Why Deposits Are Important
From a builder’s standpoint, deposits are crucial. They provide builders with assurance that homeowners are financially committed and have the funds to proceed with the project. Without a deposit, a homeowner pulling out last minute could lead to significant losses for the builder, such as lost profits, missed opportunities, and financial strain from idle staff and resources.
Deposits help builders pay for essential materials and subcontractors early in the project. For example, many suppliers, such as joinery contractors, will not begin work until a deposit is made. Builders argue that without these upfront payments, they would face cash flow difficulties, impacting their ability to maintain the project’s timeline.
Typically, design and build companies in New Zealand require a 10% deposit, which we consider the industry standard. This amount also covers costs for construction drawings and council consents.
The Homeowner’s Perspective: Concerns Over Large Deposits
For homeowners, the requirement to pay significant upfront deposits raises questions about fairness and financial risk. A 5% to 10% deposit can be a substantial burden, especially for those who rely on bank financing to cover the full cost of the project. Moreover, in many cases, lenders may not consider the deposit as equity since it represents incomplete work and doesn’t reflect the cost to complete.
While mechanisms like bonds or bank guarantees could protect homeowners, builders often avoid using them in residential construction because of the cost, which they typically pass on to the homeowner.Without these protections, homeowners risk losing their deposit if a builder fails to complete the project or goes into liquidation.
Many builders have established trade accounts or lines of credit with suppliers, meaning they often don’t require large deposits to secure materials. Consequently, some homeowners question whether large deposits are truly necessary or if they are primarily a means for builders to secure cash flow.
The Current State of Construction Contracts in New Zealand
Builders in New Zealand commonly use Master Builder contracts for residential construction. These contracts state that if the deposit exceeds 10% of the construction cost, the homeowner becomes ineligible for the Master Build 10-Year Guarantee. This guarantee covers deposit losses, non-completion, material defects, and structural issues, though it limits coverage to $50,000 or 10% of the contract value.
However, many homeowners, especially first-time buyers or those without legal expertise, may not fully understand the risks of signing construction contracts. We always recommend that homeowners seek legal advice before agreeing to terms that could expose them to significant financial risk.
The Risk of Builder Insolvency in New Zealand
The risk of construction companies going under is a real concern. In the past year alone, 546 construction firms in New Zealand have gone into liquidation, with construction firms being more than twice as likely to fail as other businesses, according to Centrix.
Homeowners have paid substantial sums for services in numerous cases, only to discover that builders never started the work or left it unfinished. These situations highlight how financially vulnerable homeowners become when they pay large deposits without sufficient protections in place.
Should Legislation Limit Construction Deposits in New Zealand?
Given the risks associated with large deposits, should New Zealand introduce legislation to limit the amount builders can request upfront?
In Australia, the maximum deposit a builder can request is 5% for projects over $20,000, as stated in the Security of Payments Act 2002. Builders who request more than this amount face significant penalties. Such regulations have been effective in protecting homeowners while allowing builders to manage their cash flow.
Our Opinion: Protecting Homeowners with Fair Legislation
While deposits serve an important function for builders, the risk they pose to homeowners is undeniable, especially in cases of builder insolvency or project abandonment. We recommend that deposits should be limited to no more than 10% of the total contract value. This would provide builders with sufficient capital to cover initial expenses while reducing the financial burden on homeowners.
Moreover, if a builder requires a deposit, the law should mandate them to provide additional safeguards for the homeowner, such as bank guarantees or construction bonds. These measures protect homeowners’ deposits and give them recourse in case the builder fails to perform or becomes insolvent.
Quantity Surveyors Conclusion
By introducing legislation that limits the value of deposits and ensures proper protections, New Zealand could create a more balanced and secure environment for both builders and homeowners. Such measures would reduce the risk of financial disputes and offer better protection for all parties involved in residential construction projects.
Elemental Quantity Surveyors are experts in construction cost management, offering professional advice across Christchurch. Managing Director Daniel Small has extensive experience in the construction industry and founded Elemental Quantity Surveyors in 2024. The company supports property developers, project managers, financiers, and investors with accurate cost forecasting and advice. Read more informative articles here.
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