New procurement guidelines released by the Government designed to reduce the number of insolvent construction companies are now in force.
The new framework that came into effect on the 1st October directs that Government departments and agencies will have to take into account a number of factors when seeking tenderers for construction projects with an estimated value of $9 million or more.
Crucially, they now have to take into account the financial health of a company tendering for a project, whether there is a strong governance structure for a project and whether the company tendering is using sustainable building practices.
But how easy is it to put the framework into effect and how effective will these directives be to implement in a way that makes an impact on the industry, without simply resulting in higher project costs for taxpayers?
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Earlier this year, Industry Insider wrote about an ‘Industry in Crisis’, examining why so many major New Zealand construction firms and their subcontractors were failing. Pundits pointed to a ‘race to the bottom’ tendering culture with open-ended contracts involving fixed prices transferring too much risk down the line to construction firms, their contractors and subbies.
Revelations that nearly a third of New Zealand construction companies are failing to comply with the new law to keep retention money in trust was, and remains a major concern.
A successful building and construction industry is vitally important to New Zealand. It accounts for about 7 per cent of our total economic activity, and employs about 250,000 people, so the Government has accepted that they had a significant role to play in the solution to these complex problems.
Registered Master Builders chief executive David Kelly told Industry Insider that the new framework is “symbolically really important.”
“There's two parts to it. The Government commitment to change the way they go about procurement in construction is really important and the new rules and the guidelines we're seeing are consistent with the commitment they made publicly.
“The other part will be seeing the behaviour of the individual Government departments, if they actually follow the spirit of it, not just the letter of it.
“I'm seeing some positive signs in that respect, that Government agencies are looking at how they go about procurement and trying to be fairer in terms of how they allocate risk. That will take some time because the critical part is that the Government agencies also need to build up their own expertise. That doesn't just happen immediately,” Kelly says
So, positive indications… but how is the Government accepting that they are going to have to take on more of that risk themselves?
“One of the critical points made in the new guidelines, is that the Government is a ‘client’. So individual Government agencies need to think about fair apportionment, or to ‘think about who's best to manage the risk’.
“As an example, if the client (in this case the government) owns a site, and they want to build on it. One of the risks is the ground conditions. What sort of land is it? Does it have a whole lot of soft spots? And so on. The argument has always been that the client is best to manage that risk because it's their land. How would a contractor possibly know what’s under there?
“So that's a good example of where the client is best placed to manage that risk. We would expect (and we are seeing) a pull back from some contracts where the contractor is expected to take the risks.”
So there was also the key issue of under-tendering or low-balling by contractors. Do the new Government guidelines help at all with that aspect?
“They don't directly address that, so that's where we need to step up from the construction side,” says Kelly.
Kelly say that Master Builders is leading this debate, consulting industry in three stages: defining what a good construction company looks like in terms of financial strength and stability, key policies and processes; establishing criteria that individual companies can benchmark themselves; and establishing a voluntary accreditation scheme.
“If construction companies are going to do Government work, we would like them to meet these minimum standards, and for the Government to recognise that,” Kelly says.
“And if we do that we should be able to stop some of this under-pricing or low balling. Because if you can't meet minimum criteria then you shouldn’t be in the game in the first place,” says Kelly.
“We believe and we hope, that it will encourage companies and their owners to leave more money in the business, and to strengthen the balance sheet amongst other things. Ultimately if contractors have to hold more capital, then they have to be paid a fair margin. And this is the conversation with Government, who accept that.”
None of this protects the tendering company against the double threat of project delays and cost inflation and Kelly points his finger at both the RMA and building consent processes as causes of distress for the industry.
“The Government has committed to change the Resource Management Act and we totally support that. And then in terms of the building process, we again think that that needs to be fundamentally changed. Our view is that there's way too many consenting authorities, and there's inconsistency right across the country. And with some of the more complex buildings, the expertise doesn't exist. So we believe that there should be some consolidation in order to get greater expertise and consistency into the consent process.”
So, is Kelly expecting change in the near future, given the new guidelines?
“We're starting to see it. I've specifically seen from a couple of Government departments that they’re asking questions around what people think of their procurement, and what they'd like to see in terms of improvement. So that's really positive. And I take them at their word, that they're serious about it. But as I say, you won't just suddenly change everything overnight,” Kelly said.
Willie Hewett of Westmoreland Homes doesn’t share David Kelly’s enthusiasm for the new Government framework, saying “personally, I think it's lip service…”
“Because here's the problem. In the industry, everyone considers the builder to be the bank. The bank wants the builder to be the bank. The client wants the builder to be the bank. And guess what? The builder's not the bank. The builder's the builder.
“Like every business, every builder and every construction company, has daily, weekly and monthly overheads. So when you're pricing a job, the costs involved in pricing work that you never get is substantial.
Then if you get the job, the delays caused in getting that work or even the delays caused once you get the work, council delays, drafting delays, financing delays… the builder's got to carry all of that cost.
“And I know the Government is saying it needs to step up and take on that fiscal responsibility, so that the builder doesn't go bust because of it, but that only helps on Government projects. It doesn't help the balance of the construction industry and we struggle with this daily. I almost lost the job this week because the client's bank didn't want any PC (provisional cost) sums in the contract, because again, the bank doesn't want to take the risk that there's a blowout on construction.
“So what the government's proposing might help construction companies who are working on Government projects, but it's not going to help the rest of the industry. Not unless the Government can convince the banks, that everyone should stop asking the builder to be the bank, and we all know that's not going to happen,” Hewitt says.
What does Hewitt say about those tendering deliberately very low and then hoping they can make up the additional money and cost with variations in the contract later on. Does the new framework do anything to change that?
“Well, I don't honestly know that it does, because even in residential construction I come up against that all the time when dealing with my competition.
“I don't know how the Government is going to stop that from happening, because I do know in commercial construction it's actually worse - especially in road works and things like that. Low tender and exclusions for hard rock, rain, difficulties, whatever. So I don't know how you stop that. I really don't.
Ultimately Hewitt thinks the explosion of Council regulation is the greatest headache the industry faces.
“I would be far happier in my business with a reduction in all the council requirements, delays and added costs. I've got two more people in my office this year than I had last year just because of council paperwork. And that's at a cost that you can't pass on.
“I've always said I would sooner build a house for somebody at cost plus say 10%, open book, than at putting on say a 15% margin and doing a fixed price contract. Because the smaller margin, but on an open book cost plus basis, would actually guarantee my profitability, whereas a fixed price with a higher margin doesn't guarantee anything.”
“Ultimately the Government has got to cut out the red tape. That is our single biggest cost of overruns, of time, bureaucracy. And it's the bureaucracy that I'll guarantee you causes a lot of these construction companies to go bust.
“I'm not saying that we should be building cheap nasty houses, but it's just throwing the baby out with the bath water, and it's just the cost that is adding to building houses is just unbelievable.”
