Events like the earthquakes and Covid drove change in the construction sector, but the ball needs to keep rolling | Content partnership
The Covid-19 pandemic drove a step change in the construction industry’s allocation of risk, but more work is needed to address the infrastructure deficit.
Bell Gully construction partner Ian Becke says he has noticed an improvement in market procurement practices over the past 12 to 24 months and suspects Covid-19 was the driver.
“Covid, and the contractual response to Covid was the first time I have seen a relatively cohesive and aligned market response to treatment of a specific event or risk.”
Even though the impact of the pandemic on construction projects is easing, the aligned response to risk allocation between stakeholders in construction projects has continued.
“It seems as though we needed to experience the market response to Covid in order to collectively realise that there are mutual benefits to proper risk allocation.”
Current challenges for the sector – including supply chain disruption, price escalation, and labour shortages – are well publicised.
Becke chaired Bell Gully’s recent Construction Panel 2022 event, focusing on the challenges of and solutions to procurement in major projects.
The panel was made up of Fletcher Building’s construction general counsel Sam O’Malley, Auckland Council’s construction and infrastructure principal solicitor Fleur Aldridge, Bell Gully senior associate Scott Lochhead and KPMG infrastructure advisory partner Mair Brooks.
Lochhead returned to New Zealand recently after close to a decade working overseas, but said when he was last in the market, prior to 2014, contractors were often asked to shoulder a fairly burdensome risk allocation. “Their contractual entitlements for additional time and cost were typically limited through a series of amendments to standard form contracts.
“What we saw come out of Covid was a real understanding that a more nuanced approach to the allocation of risk was required, both for the long-term benefit of the construction industry, and to ensure that New Zealand’s critical development needs can be progressed.”
He pointed to the Ministry of Education leading the way by opting to pay contractors the ‘net cost’ they incurred under construction contracts through the pandemic to ensure they were able to keep the lights on and were still there at the end of the pandemic, with the result that many other public sector principals followed suit.
Collaborative approach
The most common construction contract model in New Zealand is the traditional build-only agreement (NZS 3910) designed to give a fair allocation of risk, but this is often tagged with an assortment of special conditions that adjust this risk allocation.
Conversely, the 3910 contract can also be adapted to enable collaboration between stakeholders, with Bell Gully having implemented a collaborative target cost pricing model into the contract for Auckland Transport’s upgrade of the downtown and waterfront area.
One approach brought up multiple times in the panel discussion was early contractor involvement.
Downer NZ general manager Bruce Cullen says from a contractor’s perspective, major projects in New Zealand are “lumpy” with high risk and low margins.
He says a lot of major jobs the company takes now include some form of collaborative contract, including early contractor involvement.
This involvement is a collaborative approach that brings contractors on board from the beginning of a project to get input on the buildability and optimisation of designs, meaning a better understanding of requirements, risk management and value.
The approach is supposed to result in fewer disputes, fairer apportionment of risk, time and cost savings and earlier procurement of materials, a particularly relevant benefit in the current inflationary environment.
Fletcher Building’s construction general counsel Sam O’Malley says contractors are always keen to get involved as early as possible and the best risk mitigation opportunity is always a collaborative process.
Aldridge says Auckland Council has used early contractor involvement on a few projects in the past year and it has provided savings through early procurement of materials.
Lochhead says it can also be used as a tool to create a pipeline of work, making it easier to attract offshore suppliers and manufacturers who might not otherwise be interested in supplying a relatively small, low-value project in New Zealand, “Early contractor involvement is another way we can incentivise parties to put in a good bid for the works.”
KPMG infrastructure advisory partner Mair Brooks emphasises the importance of a visible pipeline to allow the market to invest in capacity in capability inside New Zealand.
She urges the industry to look at a wide range of delivery models, including design and construction contracts, early contractor involvement, alliance or engineering, procurement, and construction contracts, to identify the best and most balanced outcome.
Contracts
While fairer apportionment of risk is a key way for the industry to grow sustainably and meet the growing demand for infrastructure, it might not fly for all types of projects, particularly those being procured on a project finance basis which require a “bankable” form of construction contract.
Engineering, procurement, and construction contracts, which push a lot of risk onto the contractor in exchange for more control and a price premium, are commonly used on complex infrastructure projects overseas but have limited adoption in New Zealand given that projects are typically funded off-balance sheet.
Lochhead says there may be an initial misalignment of expectations between offshore developers who are well-accustomed to procuring under an engineering, procurement, and construction contracts model, and what the local pool of contractors would be willing to sign up for. “That’s going to be a gentle learning curve for all project participants," he says.
“I think there is also increased appetite to have fairly open and honest discussions about what represents a fair allocation of risk under construction contracts for the development of renewable projects, and a real willingness to move at either end of the spectrum to develop a mutually acceptable form of contract.”
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