As we shake the dust of 2020 from our jandals, and prepare for a summer at the beach, America’s Cup racing or cricket if you prefer, I thought I would share my thoughts on the state of the construction industry, and in particular my top five suggestions for Standards NZ’s review of the NZS3910 suite of contracts.
Construction Industry in New Zealand
2020 saw a continuation of major projects struggling to stay on programme and to keep within budget. We also saw more construction companies fail, and subcontractors buckle under the weight of carrying the cost of many of these failures. The roll call is compelling – Christchurch’s Justice Precinct and sport’s centre development; Wellington’s Transmission Gully; Auckland’s International Convention Centre, Commercial Bay and Central Rail Link reboot all spring to mind.
At a time when the construction industry is booming; housing at historical shortages; and the Government committing to a massive infrastructure development pipeline, why is this happening?
Overseas studies and surveys have identified a number of issues which are common to our local industry:
(a) lack of resources and working capital
(b) an approach to procurement which assumes a homogeneous pool of skilled, capitalised and available contractors willing to engage in competitive tendering processes
(c) aggressive procurement processes, based on lump sum pricing in a competitive market on incomplete designs and documentation
(d) optimistic allocations of risk, inconsistent with successful project outcomes
All of which, in practice, breed an environment of distrust and a reluctance to work together to deal with issues which inevitably arise, not helped by disputes mechanisms which have failed to identify and deal with disagreements early.
It has been my experience, here and overseas, that projects generally cost what they cost. They can be well planned, well managed and can come in within budget and on time – much will depend on how accurate the budget is and how realistic the programme is, and how much pricing uncertainty is reduced during the tendering process.
So what should Standards NZ take into account with its review of NZS3910?
One of Five – Plain language at the cost of clarity?
NZS3910 is the most commonly used form of contract in NZ; and many users claim they know what it means. The number of disputes arising in projects where this form of contract is used would suggest that neither proposition is an accurate measure of its suitability.
The original contract, released in 1987, filled a gap in the NZ construction market. It was based on the previous standard public works form of contract and reflected the approaches taken by the Institution of Civil Engineers, JCT and FIDIC in their forms of contract. Despite revisions in 2003 and 2013, it is fair to say that NZS3910 has not kept up with developments overseas (particularly in more collaborative approaches), addresses the needs of the industry poorly and is no longer fit for purpose.
Construction has moved on from the 19th and mid-20th century models, where the Engineer acts as project patriarch, issuing instructions and certifying payments to relatively unsophisticated builders and owners. The industry now recognises the skills all parties bring to projects, and that mutual trust and cooperation is a core requirement for successful projects. International experience, notably with the New Engineering Contract, now in its 4th Edition published by the Institution of Consulting Engineers (NEC4), which is endorsed by the UK’s Office of Government Contracting for all public sector projects, has shown that clarity does not have to come at the cost of brevity.
When the microscope goes on its terms, NZS3910 comes up wanting. Sadly, this is at the point where clarity is needed most. Egregious examples include –
· bonds (clause 3 and Schedule 3) – in what circumstances can the bond be called and what are the consequences? As a security, an on-demand is required by banks in most circumstances. In its current default form, it is little more than a guarantee for liquidated damages.
· subcontractors (clause 4) – subcontractors are poorly served in the NZ construction industry. Direct warranties are becoming more common, and most banks and major project financiers require proof of payment of subcontractors. Greater protection of subcontractors is required.
· risk register (clause 5.21) – advance warning of any issue which may affect quality, cost or time was introduced in the 2013 revision of the contract; without a risk register and more proactive use of management plans, this requirement achieves little in practice.
· Engineer (clause 6) – the dual role of the Engineer has passed its use by date. The Engineer is the owner’s agent, and the contract should recognise this role. As currently drafted, the Engineer is hopelessly conflicted. IN the traditional role, the Engineer advises on feasibility, prepares the designs, manages the tender process, administers the contract instructing variations, awarding extensions of time, certifying payments and dealing wit disputes. The Engineer has a direct personal interest in most of these activities, over and above the interests of the owner.
· suspension (clause 6.7) – the contract failed to deal with suspension following the covid-19 pandemic.
· indemnity (clause 7) – the drafting of the indemnity is too loose. Frequently, in adjudications and arbitrations, the argument is made that the indemnity is a catchall for the contractor’s liability to the owner, where it is more properly an indemnity for third party and other claims not covered elsewhere in the contract.
· variations (clause 9) – pricing of variations requires further work, as it overly favours the contractor. Similarly, the concept of treating some claims as variations and others not carrying time of profit needs reconsideration.
· unforeseen physical conditions clause 9.5) – one of the most disputed issues in construction contracts, the concept of reasonable foreseeability by an experienced contractor is unhelpful. Setting a geotechnical baseline condition for ground conditions has been an accepted approach internationally for many years, and removes considerable uncertainty.
· extension of time (clause 10.3) – awarding extensions of time for identified events on the basis of fair entitlement is too imprecise for an issue of such importance.
· defects liability (clause 11) – the reference to liability suggests that the contractor is no longer liable for defects after the nominated notification period has elapsed. The liability period is, of course, the legal limitation period in contract, limited to 10 years under the Building Act.
· Engineer’s review (clause 13.2) – the disputes procedures are too complicated, they fail to promote the early identification and resolution of disagreement, and the Engineer’s Review is inappropriate – the Engineer is the owner’s agent, typically the designer of the works, the contract administrator and has a considerable personal interest and liability under the contract. The Engineer is, as a matter of law, incapable of an impartial and independent formal review of disputes; especially when that formal review can become binding.
· mediation (clause 13.3) – the provision for the mediator to make a decision is contrary to all accepted mediation practise.
· default and termination (clause 14) – in practise, these provisions do not work (see the Court of Appeal decision in Custom Street Hotel v Plus Construction).
For a recent project involving Kāinga Ora, I was presented with over 150 pages of KO’s standard special conditions modifying almost every provision of the standard contract. In the context of the Government’s commitment in the Construction Sector Accord, this is a clear indictment of this form of contract.
The above list is not, and is not intended to be, a comprehensive list of the drafting faults of the standard conditions. It is simply an indication of how poorly the contract serves the needs of the industry and how, when clear contract terms are required (typically when disputes arise) the contract comes up short.
As mentioned above, clarity, a sensible allocation of risk and a cooperative relationship does not need to come at the cost of brevity.
In the next instalment, I take a closer look at the role of the Engineer.