The recent introduction of new procurement rules by the NZ Government1 is a positive step forward for an industry that has always suffered more than its fair share of business insolvencies – and this has been particularly severe in recent times. It follows on from the introduction of the Construction Sector Accord 2, a set of joint principles and initiatives signed by various levels of government and construction industry leaders.
These moves recognise the inherent inefficiencies and risks of stringent fixed contracts, especially where price is the primary selection criterion. There are several downsides to fixed pricing, but perhaps the most significant are these:
- Fixed pricing promotes defensive/protectionist practices by contractors as they try to protect their margins, which leads to adversarial rather than collaborative relationships. This, in turn, flows downwards to relationships between the head contractor and subcontractors.
- Fixed price contracts are supposed to set a maximum cost, but in reality, they only guarantee the minimum cost at completion – they can only go up as contractors raise variations. And the lower the initial fixed price, the more the contractor is incentivised to be aggressive on quoting for variations.
The Accord and the new procurement rules take a more holistic view of construction outcomes and focus on the quality of contractors in order to lead to better project outcomes. It is still early days for these initiatives, but they are definitely a step in the right direction.
The Accord signatories will likely also look to other comparable markets to research best practices that could be adopted. Across the Tasman there are a couple of Australian states taking a proactive approach to improving the construction sector. Australian initiatives include policy statements, like the Accord in NZ, as well as legislative measures.
In June 2018 the NSW government responded to a number of high profile project disputes and losses by contractors by introducing a 10 Point Commitment Plan 3. The Plan focuses on increased collaboration, better risk sharing and industry improvements – from procurement processes through to efficiency of payments. The 10 points are:
- Procure and manage projects in a more collaborative way
- Adopt partnership-based approaches to risk allocation
- Standardise contracts and procurement methods
- Develop and promote a transparent pipeline of projects
- Reduce the cost of bidding
- Establish a consistent NSW Government policy on bid cost contributions
- Monitor and reward high performance
- Improve the security and timeliness of contract payments
- Improve skills and training
- Increase industry diversity
Full details are available via this link: http://www.infrastructure.nsw.gov.au/media/1649/10-point-commitment-to-the-construction-industry-final-002.pdf
On the legislative front, the NSW and Queensland governments have introduced various obligations on head contractors in relation to payments, with varying degrees of consequential administrative overheads.
In 2015 the NSW government legislated a requirement for statutory trust bank accounts for retention monies on any project with a head contract valued over A$20 million 4. This requires the head contractor to deposit retention withheld from subcontract payments into a separate bank account that is held in trust for the subcontractors. The benefit to the industry is that retention monies are protected in the event of insolvency by the head contractor. The downside of this initiative is the administrative overhead on the head contractor, as well as the increased pressure on their cashflow management, as they can no longer fund their business with retention monies.
In 2017 the Queensland Government went even further than this, legislating a set of separate bank accounts per project for any government project valued between A$1million and A$10 million 5, with a view to also implementing this on non-government projects. All progress payments are made to the head contractor via a main project bank account, and all payments to subcontractors have to be made from this account, with severe penalties for non-compliance. Separate bank accounts are also mandated for retention monies (similar to the NSW model) and for any disputed amounts. These separate bank accounts effectively isolate funds available to the head contractor per project, and place a considerable overhead on their payment processes. For example, a head contractor using the same subcontractor on several concurrent projects cannot pay them via a single remittance, but needs to issue separate remittances for each project – and if one of those progress payments also includes partial retention release then there needs to be multiple remittances for that one project.
Hopefully the NZ Accord promotes sufficient collaboration between government and industry leaders that quality outcomes can be implemented in a pragmatic, constructive and timely manner. Legislation is slow to implement and incredibly difficult to get right.
One opportunity for rapid improvement is the use of digital payment collaboration platforms. Payapps was developed with the ambition to make the construction payments process more collaborative, transparent and efficient – for all parties.
Payapps provides a common platform for contractual parties so both head contractor and subcontractor are working from the same set of numbers, with all costs clearly categorised between original scope, approved variations and unapproved variations (which may be paid on account). Each party knows where they stand and can manage their risks accordingly. This also reduces disputes over differences in record keeping and focuses attention on better project outcomes.
The other great benefit of a common platform is the efficiency it introduces. It is difficult to make anything efficient if it is not consistent. Payapps standardises the process and format of progress claims for all parties and automates the bringing forward of previously certified values, ensuring claims are substantiated and assessed against an agreed breakdown of works. When both parties can rely on carried forward values being correct and can clearly see the basis of claimed and assessed values it saves considerable time, angst and unnecessary confusion.