Construction Contract Reform: Ten Guidelines the Government Could Adopt
By Sarah Holderness & Nick Gillies
“We need to lead by example and if there are things that we can do to take a leadership position with that industry then we should be.” Prime Minister Ardern1
As 2018 drew to a close, another high profile contractor failed with Corbel Construction going into liquidation, followed by Arrow International entering voluntary administration early in the New Year. This is on the back of Ebert Constructions’ receivership in July 2018,2 Fletcher Building’s near $1b losses, the financial difficulties of Hawkins, and further back the collapse of Mainzeal in 2013 – to say nothing of the insolvencies of smaller subcontractors and suppliers which do not make the headlines. It is widely accepted that this trend reflects structural problems in the construction sector, especially when these failures are occurring at a time of unprecedented demand. Change is needed if New Zealand is to have a competitive and financially stable industry that can meet the $41b of forecast spending over the next five years, and beyond.3 There are multiple causes for this trend, including industry fragmentation, a lack of scale, short term decision-making, price-driven procurement, inappropriate risk allocation, and unbalanced contractual terms.4 Apropos Derek Firth and John Walton – two senior construction barristers – recently wrote about the need for reform, and in particular the unfortunate tendency to procure works on the lowest cost basis, often before the detailed design is properly developed, and with the contractor assuming undue risk.5 There is also preoccupation with engaging a single contractor (rather than contracting directly with the larger sub-trades), even where the contractor is undertaking little, if any, physical works themselves and are essentially a glorified project manager. This can have insurance implications and, as we have seen, leave subcontractors out of pocket if the contractor falls over. This article focuses however on the importance of balanced agreements that fairly allocate risk and reflect the parties’ legitimate commercial interests. Entering into a contract with one-sided terms does not serve either party, including those in whose favour the terms may be set. A lopsided contract invariably leads to an adversarial relationship, greater contractual bureaucracy, more claims and an increased risk of disputes. None of this is conducive to quality construction, cost control or efficient collaborative working when the unexpected inevitably arises. As the largest purchaser of construction work in New Zealand, it is essential that central and local government lead by example, not only when tendering public sector projects, but also when presenting and negotiating terms. In August, following the collapse of Ebert, the Government held emergency talks with industry leaders to better understand the problem and what might be done to ensure a healthy and competitive industry. Other than upskilling workers and encouraging departments to adhere to government procurement guidelines that specify a whole of life approach, so far there has been little in the way of tangible change. BRANZ is currently researching how procurement strategies and practices support building quality in New Zealand, although it is unclear whether this will extend to contracting models and terms. In Australia the NSW Government has introduced a “10 Point Commitment to the Construction Sector” in