8 February 2019

Leading Construction Lawyer Answers the Vexed Question on How We Can Get the Construction Sector Working

Mark Williamson, Partner, DLA Piper

The vexed question of how we can build better is back in the headlines with much debate around the pace of Kiwibuild construction and the pros and cons of an Urban Development Authority.

However, the question is what other moves in the construction sector would serve the Government, and New Zealanders. The second question is whether these moves have fallen off the Government's radar in 2019. DLA Piper is gathering together major players in the building industry, with a view to fixing how we build in New Zealand. Our next workshop will address the insolvency issues plaguing our big and small firms alike. At our last workshop we asked what is wrong with the NZ approach to construction and, more importantly, how to fix it? Yes, another talkfest, but one at which we heard very shrewd opinions from industry insiders here, and the offshore experts we are bringing in for these occasions. In media we hear simple solutions proposed. In fact, the solutions are not simple, but they are doable with consistent and focussed actions that are more than short term responses to immediate events/the news cycle.

CONSIDER BARRIERS TO ENTRY

New Zealand has a licensed builder regime, but this generally only applies to residential construction. Perhaps perversely, those undertaking commercial work (which tends to be more complex and higher value) are less regulated. While no-one wants to substantially lessen competition and make skills shortages even worse, there are legitimate questions over the ease in which companies can be established, bid on projects at low cost, and then vanish as quickly as they arrived. Is the industry of sufficient national import to consider some form of prudential regulation or licensing for commercial contractors? Or will this simply create more red tape and break an already strained regulatory system. These questions need to be seriously considered and debated in an informed way.

BETTER CYCLE WAYS

We need to smooth the construction cycle. Historically, here, it goes boom and then bust. That’s because we are a little country that needs better planning. In the 'up' phase of the cycle, costs escalate. Partly that’s because discounts applied during 'down market' periods are removed, but also, suddenly, everyone wants labour. Skill shortages bite. We can see right now the turmoil of that as builders are brought in, not just from Asia but places as remote as Albania, and not always treated well; it’s desperation migration. As costs rise, the pressure goes on design time-frames. That leads to poor documentation and redesign. In turn, that causes additional costs and supply chain disruption. During an 'up' cycle contractors need to be wary about committing to significant design and build projects on a fixed price basis. We have probably learned that lesson now after the issues faced by Fletcher and Ebert, among others; the question is what to do about it.

BETTER PROJECT PLANNING AND PROCUREMENT

The answer is to eradicate or least minimise the ‘down times. A boom/bust cycle means a reluctance by main contractors and the supply chain to regularly invest in the necessary people and technology. The fix is easy to express but requires a level of co-ordination and strategic thinking across the industry and different levels of Government that, thus far, has been difficult to achieve. The impact of the mining downturn in Australia was lessened by other areas booming, and there is a way that New Zealand can develop a multifaceted industry, with different sources of construction demand rising and falling over different time periods. The solution is syncopation, and Government can play a material role. With approximately 20% of construction Government-related, there are levers that can be pulled. As the construction of dwellings slows, for example, social infrastructure investment can ramp up. In the short term, particular projects may be delayed to an extent, but this is outweighed by the benefits of centralised and co-ordinated planning. This is what the industry wants to happen, and it needs government ministries on board together with local government. We also hear of very different procurement approaches between Government departments, and agencies whose core business is procurement (for example, NZTA), can and needs to be addressed. The attitude that lowest cost is necessarily the best option needs to be universally stamped out.

NO MORE GAPS

A hot topic at our last workshop was skills immigration, and the Government's announced action plan. It was supported, but its likely success is still regarded as theoretical. One salient comment is that construction professionals working here commonly wish to buy property as well. This has become more difficult under the Government's changes to the Overseas Investment regime.

New Zealand doesn’t just need labour. Design management skills are in short supply and need developing. The industry has focussed on construction planning, but the same degree of focus and resource has not been devoted to design management (in contrast with Australia and the UK where design managers are commonplace).

DLA Piper UK Partner Sarah Thomas, who has spent more than a quarter of a century advising on major infrastructure projects, noted that the UK Government's goal of three million apprenticeships by 2020 is slipping away. (There It’s funded by an industry levy). Moreover, other countries are competing with NZ for building talent and can often pay more. But we have no choice, here. A more active approach to apprenticeships needs to be carefully looked at and debated. The Government's action plan does propose favouring contractors for Government work who take on apprentices and building construction sector skills and training is a focus of the latest Government Sourcing Rules (currently under consultation). We also need to entice young people into the building trades, which they may be reluctant to enter. Continued industry focus on issues such as diversity and management of welfare/mental health issues (particularly when sites are under stress, as currently applies in many case) must continue and increase.

STURDIER FRAMING

Investing in design processes (and getting the right people in the room early) is universally seen as key to a successful project. However, buildings are becoming increasingly complex (particularly in the services area) and key features are not standardised. In the current 'hot' market this is leading to major issues with documentation on projects, with resulting flow-on problems through the supply chain.

While contractors still like a 'good set of drawings', not every project needs to be 100% designed. Some aspects can be done during construction. These days even traditional 'construct' projects tend to involve some element of speciality design & build by subcontractors. This is where good design management comes in, and there seems to be a skills shortage here as well, with existing project managers just not bringing sufficient focus and expertise. Early contractor involvement (ECI) and Building Information Modelling (BIM) are both welcome initiatives, but initialisms can’t solve a flawed design process. Design and build procurement isn’t dead, but in the current phase of the market cycle obtaining an early fixed price appears challenging. Now more than ever, contractors need to build their design and build capability rather than being involved in death struggles with budgets. It seems fully collaborative arrangements like alliancing work well for infrastructure builds, but the experience in Australia is that they cannot be financed for vertical projects; the same would apply in New Zealand.

END THE CONTRACTUAL TOMES

Many owners and developers regularly amend the general conditions of NZ Standard (NZS) 3910 or NZS 3916 to some extent. There is general acceptance that major amendments to the standard (which can cause contracts to run to hundreds of pages) are generally undesirable and unlikely to be read and understood by all involved. In the UK there is considerable pressure from clients not to amend industry standards, but we are closer to Australia where bespoke design and build contracts are the norm, and there is extensive risk transfer to contractors. What the industry principals have told us they want is greater input into developing and updating the New Zealand standard suite of construction contracts (and that if this occurred, the documents would be more balanced and need less amendment). Credit should go to those who have been involved in creating and updating the NZS suite of construction contracts over the years. With advances in technology, though, and greater investment by Government, the standards could be more updated more regularly to reflect changing market practices and provide a greater number of options.

The way ahead for our construction industry need not be opaque. It is the role of government to oversee vital industries, and in this case, leadership would seem both necessary and urgent. Last year, a much greater focus was brought to bear by Government in light of high-profile issues and failures. This momentum must be maintained into 2019.

ENDS

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