The Government's recently announced Construction Sector Transformation Plan proposes tackling systemic challenges whilst building resilience across the construction industry over the next three years. The plan is strong on aspiration and generality, yet light on detail.
For owners, the frustrations are supply chain delays, the lack of skilled labour (or perhaps over-commitment by contractors?) and the difficulty getting the price certainty required for funding. This translates into a shortage of contractors willing or able to commit to projects and delays and cost over-runs once a contractor is secured. None of these issues are dealt with productively by the construction industry at present.
For contractors, the same pressures apply, but in reverse. Being asked to enter into a competitive tender process, based on a standard form contract, with fixed prices and tight time constraints is problematic.
It does not need to be this way, if architects, engineers, owners and contractors approach the current market constraints in a more productive way.
(1) Reduce uncertainties before contracting - far too many projects are contracted on incomplete designs, site investigation and pricing. The more time spent developing designs beyond the traditional 30% tender design (a thing of the past in too many projects), the greater the prospect of avoiding variations.
Similarly, carrying out site investigations, procuring resource and building consents, procuring rights from adjoining owners and the like to carry out the work and otherwise identifying and dealing with as many items which may disrupt the works will reduce the risk of cost overruns and delay.
Many post award deliverables can be dealt with prior to award - insurance, bonds, guarantees and warranties agreed in principle.
(2) Ensure buildability - the practical issues of how to carry out the works are squarely within the contractor's expertise. Owners and their advisors should take advantage of that expertise during the design phase. This may extend to changing structural design, and alternative specification of goods and materials.
(3) Test and fix pricing - in a more stable environment, contractors could reasonably predict the availability and supply cost of goods and materials. The current environment has resulted in many industry membership organisations advising against fixed price contracting. This misrepresents the current environment.
For most supply items, prices are available for tendering purposes. To achieve this, contractors can get prices from their suppliers, often fixed for a period up to award. Those prices can be used for the purposes of tender evaluation, and if those fixed prices expire or cannot be fixed at the time, they can be fixed in many cases at award.
There are prices which cannot be fixed, for example where suppliers simply cannot fix the price beyond immediate delivery, or the price quoted at award shifts by the time the items are to be supplied, or in the worst case, where a subcontractor pulls out of the project. In these cases, contracts need to include a level of flexibility and transparency.
(4) Price adjustment - some prices simply cannot be fixed with any certainty. Rather than imposing a fixed price on contractors through a tender process (if such prices can be achieved), there are many mechanisms for reflecting price uncertainty, for example fluctuations based on producer price indices or proven actual cost.
In any project, the aim should be twofold - reducing contingency for risk so far as practical, and achieving a level of price tension to ensure that prices are fair.
(5) Acknowledge that events may occur which disrupt the project - the covid-19 pandemic is a case in point. Our most commonly used standard form of contract, NZS3910, failed to deal adequately with the pandemic. The Government stepped into the vacuum, but for the private sector the issue had to be negotiated on a case by case basis.
Our standard form contract needs to provide more flexibility in dealing with issues outside the parties' control which cannot be managed.
So, how is all this to be achieved?
Not wishing to pre-empt the work of the Infrastructure Commission, the starting point is for owners and their consultant teams to carry out more work progressing designs, site investigations and investigating supply and buildability issues prior to tender; and tendering and contract terms need to be revised to reflect the reality of the current contracting environment.
Price certainty can still be delivered, provided prices tendered by contractors are used primarily for comparison between tenderers on a uniform basis. Following award, further work can be undertaken identifying and reducing project risks, developing design further to reduce the need for costly variations, putting in place supply and subcontractor contracts, and increasing price certainty to lump sums where achievable, and adjustment items for those prices which cannot be fixed, on a transparent basis.
To achieve this, the starting point is discipline, transparency and an environment of mutual trust and cooperation.