Con­struc­tion bust in boom times needs re­think

The New Zealand Herald - - Editorial & Letters - John Walton is the im­me­di­ate past pres­i­dent of the Ar­bi­tra­tors’ and Me­di­a­tors’ In­sti­tute of New Zealand.

Dire pre­dic­tions are be­ing made from all quar­ters about the fu­ture of the con­struc­tion in­dus­try in New Zealand but there may yet be a happy end­ing. Ac­cord­ing to one re­cent sur­vey re­ported in the Her­ald, more than half of the in­dus­try lead­ers think the in­dus­try’s in about as good shape as a leaky home. And yet, at the same time, the sec­tor has more bus­tle and ac­tiv­ity to it than ever be­fore.

As Michael Weather­all, the Simp­son Gri­er­son lawyer who heads his firm’s con­struc­tion law team, rhetor­i­cally asks, how can it be that th­ese boom times bring boom losses?

Right now, of course, the con­struc­tion in­dus­try is in­deed boom­ing — not just in hous­ing, but also in com­mer­cial and in­fra­struc­ture de­vel­op­ment. But com­pa­nies are con­tin­u­ing to fail. Why?

The an­swer lies in the con­struc­tion process and a mis­un­der­stand­ing of the roles of the par­tic­i­pants. At its sim­plest, the owner pro­vides the site, re­source con­sents, de­signs and pays for the work. The con­trac­tor or­gan­ises the work to the de­sign and to the re­quired le­gal stan­dards, for the agreed price within the al­lo­cated time. Price and time are ad­justed for un­fore­seen events and for changes in­structed by the owner. To this ex­tent, con­struc­tion con­tracts leg­is­late for un­cer­tainty.

That un­cer­tainty is ex­ac­er­bated by an in­com­plete un­der­stand­ing of other project risks (ground con­di­tions and sup­ply chain is­sues like sub­con­trac­tor and sup­plier pric­ing and avail­abil­ity) and un­re­al­is­tic ex­pec­ta­tions on the part of own­ers, par­tic­u­larly that they can fill in the gaps in the de­sign and in­struct changes at their whim with­out cost con­se­quences. The ten­der process en­cour­ages this op­por­tunis­tic be­hav­iour by forc­ing con­trac­tors to com­pete on in­com­plete, or sim­ply un­re­al­is­tic or un­fair con­tract terms.

Con­trac­tors try to in­tro­duce some bal­ance by ex­clud­ing risks from their bids. They must then rely on the claims process to pro­tect their mar­gins.

This can turn the pric­ing process into some­thing of a lottery. Typ­i­cally, the cheap­est price wins, which all too of­ten is sub­mit­ted by the con­trac­tor with the great­est ap­petite for risk, cou­pled with the most op­ti­mistic ex­pec­ta­tions for mak­ing claims un­der the con­tract.

Fol­low­ing con­tract award, man­ag­ing de­sign de­vel­op­ment, con­struc­tion and capri­cious owner changes to the de­sign be­comes a con­sid­er­able headache for

Own­ers (in­clud­ing, alas, the gov­ern­ment) use the ten­der process to trans­fer greater risk to con­trac­tors.

con­trac­tors who need to be able to meet con­struc­tion costs, pay sub­con­trac­tors and pro­tect their al­ready slim mar­gins.

In re­turn, own­ers (in­clud­ing, alas, the gov­ern­ment) use the ten­der process to trans­fer greater risk to con­trac­tors by lim­it­ing op­por­tu­ni­ties for claim­ing ad­di­tional pay­ment and time.

Thus the lines for bat­tle are drawn for what is now be­ing re­ported as the win­ter of our con­struc­tion dis­con­tent.

The in­dus­try has a choice. Ei­ther it ac­cepts that de­signs and prices will change and pay con­trac­tors ac­cord­ingly, or take the time to re­move con­tract un­cer­tain­ties be­fore fix­ing the price and in­struct­ing work to com­mence. Ex­pe­ri­ence here and over­seas would sug­gest that a com­bi­na­tion of the two works best.

Newspapers in English

Newspapers from New Zealand

© PressReader. All rights reserved.