Construction ‘crisis’ is not all doom and gloom

In the middle of a building boom, the insolvencies of several high-profile construction firms have thrown the construction industry into the spotlight and highlighted key industry-wide issues.

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Construction faces many unique challenges: unpredictable weather, site conditions including unforeseen ground conditions, site access issues, and challenges with health and safety.

And the industry is affected by commodity price increases, where the cost of building materials has escalated. Recent challenges have sparked much-needed national dialogue among industry participants in a bid to forge a new and more productive path.

Much attention has been focused on project delays, defective work and cost blow-outs. None of these issues is isolated to New Zealand’s construction industry.

In 2018, the Australian government released the Shergold Weir report Building Confidence, which identified several critical issues in the wake of cracks showing in Sydney’s Opal Tower. And in the UK, a large government project, the London Crossrail, is expected to be delayed by five years and almost $3 billion over budget.

Skills shortage

Skills shortage issues persist in the industry with many employers struggling to find experienced project managers and labourers.

This issue is twofold: a loss of contractor/ administrative experience as companies cut costs and reduce the number of employees due to increasingly tight margins, and difficulties attracting people to the sector. Compounding matters, the failure of large construction firms could reduce the attractiveness of the construction sector to those looking at future career options or a career change.

Lowest-cost mentality

The industry’s “lowest-cost bid” mentality has been much discussed. When projects are assigned through tenders where the lowest-cost bid wins, projects often fail to satisfy the agreed specifications and can result in variations and/or extension-of-time claims being made.

These ultimately result in higher project costs and delays in completion, often leading to costly disputes and fractured relationships. Accepting the cheapest tender price can often decrease innovation within the industry, and stifle research and development. And more qualified and experienced contractors can miss out on jobs, feeding into the issues described above.

The industry needs to be steered away from the lowest-cost mentality, requiring principals to re-evaluate how they may traditionally assess tender offers.

Risk allocation

Risk allocation has been a hot topic in both public and private sector procurement.

Contractors, particularly, have voiced concern about the levels of risk being transferred to them. For example, in many cases contractors assume risk of ground conditions without enough information and /or time to completely consider the risk and price it into the contract.

In addition, the historic ‘lowest-cost bid” mentality often means this risk is not accounted for in the pricing. The contractor may hope to claim a variation to recover costs if the relevant risk is realised. Disputes and cost blow-outs may follow as the contractor will face difficulty if the variation relates to a risk it assumed under the contract.

The principal and contractor need to consider the benefits of both parties facing the issues of uncertainty and risk realistically at the outset and working together to apportion risk fairly, including consideration of sharing the risk and /or exploring risk mitigation strategies.

Design risk provides a good example of the imbalanced expectations between client and contractor. Clients may look to transfer design risk to a contractor that may not have suitable skills or resources to manage design. This is unlikely to lead to good project outcomes and can have huge financial implications on the contractor and ultimately the project.

Linked to the idea of risk management are issues associated with uncertainty about future projects and insurance costs.

The often-unpredictable nature of construction projects means it can be difficult for construction companies to plan future work, and to allocate resources and labour.

Insurers are taking on less and less risk, yet insurance costs are increasing (particularly in Wellington and Christchurch), and policy coverage is also coming under the spotlight. As a result, parties need to carefully consider how they allocate and manage risks because they cannot always rely on insurers to cover costs.

Rigid consent processes

Some industry players have complained that government red tape is hindering their ability to complete projects on time.

They cite complexity and rigidity in the current building consent process, coupled with the unprecedented growth in consent applications as an issue because it means council bodies struggle to meet statutory timeframes, resulting in project delays.

This is a difficult trade off. While it is important to focus on ensuring quality construction and learn from the era of leaky buildings, it is also important to ensure this does not inordinately slow down construction progress.

Standardised contracts

An ongoing debate for the industry is whether a standardised construction contract should be adopted. The industry believes standard form contracts (eg, NZS, ACENZ and NZIA) favour the contracting counterparty and not the client.

Clients often do not feel they get a fair risk allocation under these documents and therefore tend to heavily amend standard form contracts by adopting special conditions. These can lead to disputes and uncertainty.

There is a call for proper standardisation across the industry but this should be led by, and have buy-in from, all project participants.

The future

The outlook for construction is not all doom and gloom. The industry has long been at the forefront of innovation and creativity in the face of adversity.

Change is underway with respect to the government procurement rules. While it procures less than 20% of construction in New Zealand, the model has been largely silent on leveraging the work to achieve broader social, economic or environmental outcomes.

The Ministry of Business, Innovation and Employment (MBIE) recently released a draft of the Government Procurement Rules (fourth edition) and this should set out the government’s standard of good practice procurement.

The most significant proposed change is the requirement for agencies to consider and incorporate “broader outcomes” when procuring goods and services.

Cabinet and ministers may also now designate contracts against specific priority outcome. For example, one of the set priorities is a focus on “construction skills and training”. The government intends to leverage procurement to encourage businesses to invest in their workforces. This is seen as a significant positive step for the industry.

Importantly, the proposed rules have addressed risk allocation head on, particularly through the new proposed Government Procurement Charter. Under the charter, the government would direct agencies to “manage risk appropriately”.

Responsibility for managing risks should be with the party – either the agency or the supplier – that is best placed to deal with it. Agencies must not transfer all the risk to the supplier.

Building regulations

Prioritisation of positive change can also be seen through the work of MBIE’s Building System Performance Branch (BSP). This focuses on influencing change in the building regulatory system- i.e., the life cycle after procurement.

Importantly, there is industry-wide discussion and engagement with government. This highlights the private and public sector’s focus on improving the state of the industry.

Scott Thomson is a senior associate & Charlotte Marsh a law clerk at MinterEllisonRuddWatts.

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