Construction contract battles on rise and more to come

Stormy skies ahead over construction contracts, sector survey suggests.

Disputes in the $15 billion New Zealand construction sector are on the increase and a new survey result suggests more troubles are ahead in the next two years.

A report from law firm Russell McVeagh on its survey of construction developers, engineers, contractors and project managers on trends in the building industry comes as the sector deals with high-profile contractor insolvencies.

The firm earlier this year invited more than 200 parties to participate - 56 responded, most involved in projects valued at more than $10 million.

More than 70 per cent of respondents predicted more disputes were on the way.

The number one factor identified as contributing to disputes was a lack of understanding of contract obligations, with bespoke contract amendments not always read and understood by all parties, said the report entitled "Getting it right from the ground up: construction disputes - the causes and how to avoid them".

Russell McVeagh litigation partner Polly Pope said it came as little surprise that more than 60 per cent of respondents believed disputes had been on the rise for the past two years.

"While some causes of a rise in disputes appear to be structural to the industry, for example, skill shortages - others, particularly around relationships, risk allocation and contractual terms are within the parties' control and would repay a focus at the outset of any project," she said.

Principals (developers) and contractors identified developer variations as the leading cause of delays but didn't agree on what the other main causes were, the report said.

Principals blamed slow construction and the consent process while contractors blamed the quality of design.

Finance and insolvency ranked lowest of perceived causes of construction delay, though since the survey Russell McVeagh noted a marked increase in insolvency-related construction disputes and said it expected the trend to continue in coming months.

Many respondents - particularly contractors - focused on the issue of risk allocation under the contract, said the report.

Principals in particular focused on labour and materials shortages, higher costs and lower margins. Themes in respondents' comments reflected the concentration of risks in the centre of the contractual chain. The pressures which resulted were ultimately felt by all parties so it was unsurprising to see these concerns raised, said the report.

As for solutions, principals focused on the need to fix the skills shortage through training programmes and immigration.

Contractors, who focused on poor risk allocation in contracts, called for more standardisation of contracts with a fairer risk allocation.

All respondents favoured negotiation between the parties over more formal dispute resolution, said the report.