Accord-aligned contracts

By - , Build 180

Post the Construction Sector Accord, what does fairer risk allocation in construction contracts for work on school projects look like?

THE MINISTRY OF EDUCATION’S Education Infrastructure Service (EIS) is responsible for managing the Crown’s school property portfolio of over 2,100 schools with a replacement value of $29.7 billion as at the end of the last financial year.

The sheer size of the education property portfolio makes the Ministry one of New Zealand’s largest asset managers and users of construction services. Put simply, the Ministry has a vested interest in the health of the New Zealand construction sector.

Contracts amended to address risk allocation

The Construction Sector Accord, with the Ministry as signatory, launched in April 2019 with an aspirational call for fairer risk allocation in construction contracts. But what does fairer risk allocation actually look like? What does it really mean within the pages of special conditions to NZS 3910:2013 Conditions of contract for building and civil engineering construction contracts?

As part of its 2019/20 annual construction contract review, the Ministry has amended its contracts to specifically address risk allocation and promote the Accord’s commitment to fairer outcomes. The Ministry’s major works construction contract is based on NZS 3910:2013 and is publicly available on the Ministry’s website.

The Ministry consulted widely with the industry and its directory of main contractors, commissioned expert reports from consultants KPMG and Aurecon and engaged directly with Accord members. It has now actioned the following updates to its contracts to address key areas of fairer risk allocation.

Retentions halved

The Ministry previously held retentions and refunded 50% of that cash on practical completion, retaining the balance until final completion. To balance risk and ease pressure on contractor cash flow, it has reduced the percentage of retentions it will hold by half.

These will still be collected to cover the defects liability period until final completion, but by retaining 50% less from the outset, the Ministry aims to achieve fairer outcomes and better support the cash flow of its contractors and subcontractors.

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Bonds in lieu of retentions

Contractors will also now be given the option to provide either cash retentions or a bond in lieu of retentions, giving them greater flexibility to manage their cash flow demands on a project-by-project basis.

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Time bars

The Ministry has moved away from time bars as its default position. Across multiple special conditions, it has deleted specific timing requirements and has reverted to the NZS 3910:2013 position of entitling a contractor to give notice of an issue within a reasonably practicable time. The Ministry has further deleted outright its time bar provision expressly disentitling contractors to variation claims should they be out of time.

This is no easy fix, but the Ministry is committed to fairer outcomes. Removing fixed timetables for claims will require a commitment from all parties to the contract to work openly, fairly and reasonably in submitting notices and claims within an appropriate time for each project.

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Variation price requests

The Ministry’s special conditions entitled the Ministry to request a variation price request (VPR) for additional works. The engineer to the contract retained an ultimate unilateral right to require the work to be done and impose the price.

The Ministry has deleted in its entirety this unilateral right to impose a price for VPR works as this was recognised as an unfair risk on the contractor’s programme, resourcing and pricing. The VPR process now requires the mutual agreement of the parties, better reflecting the Accord’s partnership approach.

Unforeseen physical conditions

The Ministry’s special conditions previously required contractors to fully inspect the site and carry out reasonable investigations to identify any potential unforeseen physical conditions – for example, soft spots or rock. What these investigations were was not defined, and such uncertainty was often seen as an unfair burden on the contractor.

Industry feedback raised concerns that the risk for ground conditions sat more rightly with the Ministry (through its consultants) as both the landowner and principal. The special condition further imposed a timeframe of 5 working days for contractors to notify the Ministry of becoming aware of previously unforeseen physical conditions in conjunction with the burden of the time bar restriction. The Ministry has now more fairly allocated this risk by removing the time bar and reverting to the standard NZS 3910:2013 provision.

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Utilities

The Ministry has removed its special condition requiring contractors to search all records to determine the existence of utilities and reverted to the NZS 3910:2013 standard position.

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Less noise

The Ministry has deleted clauses seen as noise – that is, they restated the position that already existed at law or in the NZS 3910:2013 general conditions – endeavouring to reduce the noise and delete superfluous provisions.

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Warranties – materials, workmanship and weathertightness

The Ministry invests billions of dollars of taxpayers’ money into the construction of schools. On behalf of taxpayers, it maintains its expectation that contractors stand behind their work and, to that extent, will retain its form of 10-year weathertightness warranty.

However, the specific appendix of material and workmanship warranty requirements have now been updated so that they are aligned with current market standards, and the Ministry has committed to including a review of its weathertightness warranty requirements in its next annual review.

Welcome to the 21st century

The Ministry has also included a few simple but overdue modernisation updates:

  • Gender neutral – drafting has been corrected to reflect gender neutrality.
  • Electronic world – references to facsimile have been replaced by email addresses and data now expressly includes electronic formats. The Ministry has also launched DocuSign to enable the quick and secure electronic signing of construction and consultancy contracts under $7 million in value.

The Ministry’s commitment to the Accord and fairer risk allocation is an ongoing and continuous process. It undertakes an annual review of its construction contracts and will seek further industry feedback on risk allocation, including liabilities and warranties, in the 2020/21 review.

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For more

A full summary of the current changes and updates on the coming review can be seen in the Infrastructure News publication on the Ministry’s website at www.education.govt.nz.

Download the PDF

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Articles are correct at the time of publication but may have since become outdated.

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