10.04.2018

New Zealand Construction Report

The Government has released its Construction Report, which takes an in-depth look at the state and direction of NZ’s construction industry.  Construction is one of the largest sectors in NZ’s economy.  The report signals an unprecedented boom and a strain on capacity over the next decade.

The report’s release follows a Government paper on 6 November 2013 (Residential Construction Sector Market Study Options), which seeks views on a range of proposals to reduce residential construction costs in NZ, and a Ministerial announcement that a new $13.6m tertiary school of construction is to be established in Wellington.  These developments are in anticipation of a “huge wave” of construction activity from the Christchurch rebuild ($30b estimate), Auckland’s housing shortage, a backlog of infrastructure projects and the leaking buildings tail.  They also reflect the Government’s frustration at a sector which it regards as fragmented, risk-averse and suffering from a lack of competition.  The proposals do not, so far, include any measures to address the widening of tort law in New Zealand in recent years, which has encouraged scatter-gun claims, most notably in leaky building disputes.

The expected boom presents many opportunities for construction firms and the wider economy, including the chance for improved scale and productivity.  However, there is concern that the small size of many NZ entities will limit their ability to take advantage of these opportunities or – worse – that they will struggle to manage more or larger projects.  This is compounded by a shortage of skilled labour across the board.  These factors may see more international firms enter the NZ market over the next few years, particularly on the consulting side.

From a legal perspective, the strains on capacity coupled with the expected demand are a recipe for delays, disruption, cost overruns and ultimately claims.  The Government seems to recognise this to some extent in that it proposes an “Integrated Project Delivery”, which promotes an open, collaborative risk-sharing approach.  It is unclear what this would actually mean in practice or how it might be recorded in contract.  Commercial parties want certainty, especially when it comes to allocating risk, and admirable but vague concepts about collaboration often sit uncomfortably with this when it comes to negotiating and executing terms.

The construction industry already benefits from a variety of standard form contracts, produced by respected industry organisations.  In our experience, having the right contractual framework, together with a robust procurement process and careful project management, are fundamental to the success of a construction project.

Even then, claims can still arise.  Early identification and prompt resolution is always preferable – not least because it avoids protracted and expensive disputes after completion.  Adjudication is an essential tool in achieving this and the anticipated amendment to the Construction Contracts Act extending adjudication to consultants is to be welcomed.  The sheer volume and pace of building work in NZ over the next few years means adjudications are likely to become more prevalent.

In some instances (eg large infrastructure projects where delays would be intolerable), it may be appropriate to use a Dispute Resolution Board.  A DRB comprises independent persons appointed by the contracting parties at the outset of the project, who meet during the course of the works to hear and resolve issues as they arise (subject to a right of appeal to arbitration).  Admittedly, a DRB will add another preliminary overhead but they can be a more cost-effective way of resolving disputes since the board is closer to the project.

For more information, or to discuss any aspect of construction law, please contact:

Nick Gilliesnick.gillies@heskethhenry.co.nz or +64 9 375 8767

Christina Bryantchristina.bryant@heskethhenry.co.nz or +64 9 375 8789

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