Big changes loom for building law

Building legislation is facing its biggest upheaval in 15 years.

The sector hasn’t covered itself in glory in recent decades: leaky homes, defective cladding, shonky steel and ill-trained workers, to name but a few of the issues bedevilling the industry. If there’s a shortcut to be taken, the building industry knows how to make it happen.

Attempts to fix problems in the industry haven’t always worked and the Ministry of Business, Innovation & Employment (MBIE) has launched a wide-ranging review.

MBIE’s consultation on the Building System Legislative Reform Programme covers five main areas:

  • Building products and methods
  • Occupational regulation
  • Risk and liability
  • Building levy Offences, penalties and public notification

Reform is in its early stages but aims to tackle long-standing problems such as low productivity, inefficient practices and processes, skills and labour shortages, and poor health and safety.

High on the list is the thorny question of risk: both the industry and building consent authorities (BCAs) are carrying too much of it.

But will fixing these problems push up costs? And are some of the proposals, such as compulsory guarantees and insurance, even possible?

Chapman Tripp partner Hamish Bolland, who specialises in construction and major projects, says much has changed in building in the 15 years since the legislation was introduced in 2004. It’s high time for the legislation to be reviewed.

Among other things building technology, especially in building products, has moved forward and the legislation hasn’t necessarily kept pace.

The weakness in the current structure, says Bolland, is a lack of clarity about different rules and responsibilities of the various players and how they intersect with each other. For example:

  • product information is not always available
  • there are considerable difficulties holding building companies and trades to account for the quality of their work
  • BCAs can sometimes take differing approaches to building code requirements
  • BCA certification for offsite materials used in pre-fabricated construction could benefit from a clearer process.

The proposals are a step forward, but not a silver bullet for the building industry’s systemic issues, says Russell McVeagh senior associate Michael Taylor.

“[They] are focused on the residential housing and consumer market, where they are likely to drive up construction and safety standards of buildings, as well as associated professional services,” says Taylor. “However, they are unlikely to have a significant impact on the commercial sector.”

It’s not that the industry is broken, says Professor John Tookey, AUT’s head of department, built environment, and author of the report, The Mess We’re In.

It’s more like straining at the seams, thanks to escalating expectations and greater demand, while the industry is taking on more risk as profit margins fall.

The client is king in New Zealand, putting the industry under pressure, says Tookey. “Clients want everything. They want beautiful buildings, no defects and brilliant workmanship. They want to pay nothing for it and the building industry to carry all the risk.

“In that context you end up with a situation where the moment [the builder] wins the contract, the drama starts. It is the builder who left out the most in the tender document that wins the contract. When you are carrying all the risk and have minimal development times, [there is a] requirement to do everting quickly. You end up with an industry struggling with the demands placed upon it.”

Risk and reward
It’s the risk and liability side of the reforms that has captured the attention of many lawyers and, in particular, a proposal to make guarantees and liability insurance compulsory.

In the past, homeowners have struggled to get redress when things go wrong and the cost often fell upon the last man standing, which was the BCAs. They were particularly hard hit by the leaky homes crisis.

Taylor says the proposed scheme benefits homeowners by providing a single point of claim when things go wrong and takes some of the stress out of dealing with a defective home.

Bolland adds the focus of the reform is on reducing the exposure of homeowners.

“In the residential sector the proposal is to require all new buildings and major alterations to be covered by a guarantee and insurance.”

MBIE has indicated there is still much work to be done in quantifying the costs and benefits of the proposals. Some of the key issues identified, says Kensington Swan special counsel Helen Brown, are:

  • How easy will it be for builders to obtain these products so they can offer them to homeowners?
  • Will the scope or coverage of these products meet the objectives identified in the proposal?
  • What additional compliance will be needed, particularly if it is mandatory to offer it?

There is an ability to opt out of this requirement and this has caused some commentators to raise an eyebrow. Bolland presumes the reason for a potential opt-out is that the insurance comes at a cost.

“If we have this product, it makes your home more valuable. [But the] cost will be passed on to the consumer in the house price. The question will be how good the guarantee is - in this case, what the exclusions are, and whether it is underwritten by someone credit worthy.”

As the Australian experience has shown, the market can struggle to provide the required insurance product, Taylor says.

Even the discussion document makes it clear it could be a difficult call. It refers to the long, expensive and stressful processes homeowners face in trying to get compensation when something goes wrong.

Brown says introducing mandatory guarantees and insurance products may not alleviate this for homeowners if insurance claims, and claims under guarantees, are also in the mix.

Last man standing
Building consent authorities (the BCAs) have found themselves in the position of being the last man standing when building goes wrong. Developers, builders and others can get off the hook by simply liquidating their businesses.

The two proposed options for BCAs, says Bolland, are:

  • Sticking with the status quo on the assumption that introducing this reform effectively reduces exposures to BCAs.
  • BCAs have a liability capped at 20% of the total loss by home owners. That is probably a good result for BCAs. But if a builder or developer becomes insolvent, which is not unusual, it could still leave the building owner seriously out of pocket if the BCA’s liability is capped.

Taylor says if liability settings for BCAs remain unchanged, they could still be pursued by insurers and the last-man-standing problem is unlikely to disappear. It is questionable, he says, whether the changes will have any impact on the BCAs’ approach to issuing of building consents.

Occupational regulation
The area of occupational regulation is of most interest to Brown given her experience in professional regulation and the interface with construction.

The proposals are designed to deliver safe and durable buildings and greater public confidence that those involved in the process are competent.

In terms of occupational regulation, the aim is for projects that are completed with the right people on the job, with a level of competence commensurate with the nature of the project, says Brown.

“The proposals are therefore targeted at addressing risks by expanding the scope of restricted building work to include more complex non-residential building work,” she says.

“The proposals include other changes directed at engineers by introducing a new voluntary certification scheme, restricting who can carry out or supervise safety-critical work, and establishing a new licensing scheme.

“One issue to be played out through the consultation process is how the regulatory system will look for engineers and striking the right balance in terms of the level of oversight by government and self-regulation by the professional body.”

One of the outcomes is to have a high-performing building sector with skilled and competent people involved. Therefore, says Brown, there may be questions about why others who are heavily involved in the building process, such as architects and designers, are not captured by these reforms.

A key point from Brown on occupational regulation is that to achieve public confidence in the sector, the system needs to be clear and easy to understand, with the right mix of government oversight and professional bodies playing their part.

Tookey says there may be unintended consequences to changes to the licensed building practitioner (LBP) rules. “If you raise the bar in terms of capabilities, are you making more staff available to make it happen?” And who will pay the increased cost?

Ironically, the government may be the hardest hit by some of the proposals, says Tookey. It is a customer for infrastructure projects and if, for example, it wants to increase Kiwibuild’s output, there will need to be LBPs for building those projects.

“I could imagine a scenario where one side of government says ‘hang on, get back in your box’,” says Tookey.

Along with the government, many other businesses and organisations may want their say. Trade organisations, for example, are raising questions about how to provide the additional people needed to make the system work and whether clients are willing to pay for more highly skilled employees.

Even banks are interested, says Tookey. “Ultimately banks will be looking at this very carefully.”

Other organisations with concerns include Engineering New Zealand, New Zealand Institute of Architect, Royal Institution of Chartered Surveyors (RICS), the New Zealand Institute of Building (NZIOB), product suppliers such as Winstone Wallboards, construction companies such as Fletcher Building and Hawkins and, as Tookey puts it, “all the other punters knocking around the joint.”

“They will be saying, ‘what does this mean to [my business] and my risk?’”

Tookey says the jury is out on how many of the proposals floated in the discussion document will work and/or make it into law.

“It depends on how radical [the] legislators wish to be and it depends to a certain degree on what they think they can get away with.”

Submissions close on June 16.

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