Industry is very focused on Construction Contract Risk

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The rise of additional clauses being added to industry standard contracts such as NZS 3910, along with the prevalence of bespoke contracts being created for commercial construction projects, has resulted in risk being transferred away from the client and onto consultants and contractors. As evidenced by the troubles experienced by a number of companies in our sector, the New Zealand construction industry has not handled this development well.

The NZIOB Northern Chapter AGM on the 23rd of May included a forum for industry stakeholders to engage on this issue. A panel of experts comprising; Contractor, Gary Walker of Hawkins, and Lawyer, Mark Crosbie of MinterEllisonRuddWatts, was assembled, with moderation by Northern Chapter President, Terry Buchan. The focus of the discussion was on risk as it relates to the head-contractor fraternity. The general theme that emerged from the two panellists and several industry leaders in attendance on the night, was that the industry has lacked maturity in dealing with the changing contractual environment.

It is apparent that many contractors are ill-prepared to understand the risk implications that are inherent in some of the new breed of commercial contracts, and/or that the risks associated with these contracts have not been clearly identified and appropriately costed. The contractor panellist expressed the view that risk should be incorporated into the price and feature as a line by line response to the associated risk. The cost of the risk sits outside of the margin, not within it, as risk and margin have nothing to do with each other. In addition, risk should be transparent and be well understood by the supply chain who have collectively signed up to deliver a project.

From the Lawyer panellist’s perspective, good advice is to get advice when it is apparent that the appropriate legal skillsets to understand a contract clause do not lie within a contractor’s in-house team. The rise of lawyers being engaged by contractors at procurement stage was noted as being an emerging theme that is making a positive difference. This is a sensible approach, as is learning to say no to the signing of a contract that is not well understood, or that creates a level of risk that is deemed to be uncomfortable to the contractor. The example provided of a contractor recently walking away from a large hard-sum contract due to perceived inequitable risk, which then led to the client re-evaluating their procurement processes, was seen as a signal that industry maturation is occurring.

There are many aspects to the discussion on risk, with the implications of accepting novated design risk being one, see NZIOB Honorary Member, Jack Smith’s paper on this topic. The role that government has to play with the contracts that it is taking to the market has also been well covered in a recent NZIQS paper. The NZIOB forum on the topic of risk was a valuable addition to the industry-wide discussion, which collectively has the potential to lead the construction industry to an advanced level of maturity on how to deal with this topical subject.

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