The pitfalls of labour-only building contracts

When the seriousness of the leaky building crisis became apparent to the Government in the early 2000’s, they set up a “Weathertightness Overview Group” to enquire into the causes of the crisis and to make recommendations. Their report dated 31 August 2002 (the “Hunn Report”) had this to say about the building industry: “Today, project management appears to be a matter of programming and co-ordinating the arrival of materials and sub-trades on site. Quality assurance on site appears to ‘get lost’. The advent of the labour only environment has contributed to the demise of the main contractor who formerly had an ongoing relationship with, and responsibility for, standards of workmanship. In addition, the absence of the architect or Clerk of Works as an agent of the owner supervising the quality of the works has had an adverse effect on the quality of the overall building product.”

What is a labour only building contract? It is an arrangement whereby the builder contributes his carpentry skills to the project, but instead of taking overall responsibility for it, he merely works alongside the other specialist tradesmen. He is told to leave the selection and hiring of all the tradesmen, the procuring of the building materials, and the coordination, supervision and quality control of the project to the property owner, developer or group home building company. This approach gained popularity late last century because it was seen as a clever way to cut costs. Many property owners naively believed that project management was a straightforward exercise they could do in their spare time, and this enabled them to avoid paying the margin to the builder that he would otherwise receive for performing this function.

Unfortunately, management of a building project is way beyond the capabilities of a part-time, inexperienced amateur. Consequently, one of two things tended to happen. Either the project became like a sailing ship aimlessly drifting through the waters without a rudder and without a captain. Or, realising that the project was likely to turn to custard if he didn’t do something, the builder voluntarily assumed the role of project manager – and all the potential liability that went with it – but without being paid a brass razoo for the extra effort or responsibility. Those builders now regularly crop up as defendants in substantial leaky home or building defect claims. But tragically, old habits die hard, the practice of doing residential building projects on a labour only basis is still rampant, and the warnings sounded by the Hunn report over a decade ago have gone unheeded. This has got to stop.

Labour only contracts work okay where someone with suitable qualifications and experience is genuinely supervising the building project both competently and continuously. So, for example, if the property owner is a builder himself and is working full-time on the site coordinating the activities of the carpenter, plumber, electrician, plasterer, roofer, etc. then that should present no problem; similarly, where the owner is not a builder but has appointed an architect, engineer, building surveyor or another builder to act as project manager, and that person is actually visiting the site on a daily basis and is not just trying to do the job by remote control. Alternatively, it should work where a group home building company is coordinating the project and one of their personnel with appropriate qualifications is acting as site supervisor, or where an experienced builder has been appointed as the head contractor and all the specialist tradesmen are subcontractors to that builder.

The problems arise where the supposed project manager either has insufficient building experience or insufficient time to devote to the project. Homeowners and developers most often fall into this category. The labour only arrangement anticipates (expressly or impliedly) that the homeowner or developer will, like an orchestra conductor, ensure that all the tradesmen are synchronised and operating harmoniously and efficiently, and that all the required building materials comply with the specifications, meet the necessary quality standards, and arrive on site in the right quantities and at the right time. Even though the builder might recommend some of the tradesmen, or allow building materials to be purchased through his trade account at a discount, the owner or developer still has the overall responsibility to ensure that the project functions like a well-oiled machine.

Strangely though, the law doesn’t quite see it that way. A succession of High Court or Court of Appeal cases (Mowlem v. Young 1994; Riddell v. Porteous 1998; Boyd v. McGregor 2010; Findlay v. Slater 2010) have held that the fact that a builder is engaged on a labour only basis does not absolve him from responsibility to act as if he was effectively the head contractor. It is fair enough that the builder should be held accountable for his own workmanship and that he should meet the standards of a reasonably competent practitioner of his trade. But often the defective workmanship arises because of some uncertainty or ambiguity as to whose responsibility it was to install a particular flashing or seal a particular joint. In those circumstances it is the project manager’s role to detect the oversight and resolve the uncertainty – a task that was manifestly neglected by the homeowner in some of these cases.

The courts have been understandably reluctant to hold a homeowner responsible for avoiding workmanship defects that he did not have the skill to detect. But if he chooses to assume that responsibility in the mistaken belief that it will save him money by not having to pay the builder to perform that function, he should be held accountable for it. There have been some disturbing suggestions, particularly by the Court of Appeal, that the owner can simply pass the buck to the builder by default. At least in Findlay v. Slater the High Court held the homeowner 40% responsible for his neglect, although this was reduced from the 85% that the Weathertight Homes Tribunal adjudicator had attributed to the homeowner at first instance.

The lesson for builders and homeowners is very simple. Treat labour only projects like a hot potato.

Geoff is the proprietor and senior lawyer at Madison Hardy, and a former partner at Simpson Grierson. He was an ADLS Councillor from 2006-11 and Vice-President from 2009- 10, and has been the Convenor of ADLS’s CLE Committee since 2010.

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