Dialogue: Bill will give warning but no guarantee

By EVAN GEEVES*

Security of payment begins at the source.

This should be the mantra for all who think that the Construction Contracts Bill is the panacea for the ills of the building industry.

While it is a step in the right direction, the legislation will not solve all the problems that have manifested themselves over the past two years.

It also poses problems for the wider industry that have not been fully debated.

Interestingly, a good deal of attention has been focused on the plight of subcontractors, who are possibly perceived as minnows swimming among the shark pack of contractors and developers.

It should be emphasised that this bill is designed to protect all the parties to a contract, as Associate Commerce Minister Laila Harre has tried to point out.

When the Liens Act of 1939 was repealed it left a vacuum to which the Golden Rule was applied. This states: He who has the gold makes the rules.

This has been evidenced in increasingly onerous contracts, shrinking margins, more litigation and the collapse of businesses.

The parties who benefit most from this process - the lawyers, mediators, arbitrators and liquidators - are not the ones directly involved in the building industry.

We have therefore witnessed a shrinkage of the industry as cash flows out and is not ploughed back in, be it in the form of training or research or the other staples of a vibrant enterprise.

So while we generally acknowledge that the Construction Contracts Bill will right some wrongs, we should heed the message of Gareth Hoole's article (Business Herald, May 25): Don't rely on the bill's good intentions.

The potential pitfalls may be summarised as follows:

At best, the procedure will serve as an early warning of financial instability of a principal, a contractor or a subcontractor.

In any dispute, the contractor and/or subcontractor will be at risk for the cost of work carried out during the 30 days required for a dispute to be adjudicated.

Resolution of disputes, and maintenance of the cashflow that is the lifeblood of the industry, will depend on the availability and skill of adjudicators.

If neither of these is available in sufficient quantity, the 30-day limit may become an unachievable target.

If so, the exposure of contractors and subcontractors will increase as standard contracts do not permit work to be suspended during a dispute.

Given the recent history of the industry, there is likely to be an overreaction to disputes, leading to an unsustainable number of adjudications.

It is unlikely that the industry will be able to cope for a number of reasons besides the above:

* Many, if not most, disputes involve the valuation of variations that are often paid on account in progress claims because there is not enough time to fully evaluate them.

They are often complicated and the resources of most quantity surveying firms or other certifying agents are not sufficient to finalise them month to month.

* The quality of documentation produced by consultants often exacerbates the problem.

This is not a criticism of consultants but a reflection of professional fees being ratcheted down by principals to save costs.

Yet poor documentation is false economy as it causes an increase in variation claims, and thereby the potential for more disputes.

As a direct result of the above, there will be pressure on adjudicators to make decisions within a constricted timeframe of 30 days, when in reality the correct decision may require more time.

Arbitrations currently enjoy a gestation period roughly the same as an elephant's, but are generally thorough.

Under the new legislation, contractors and subcontractors, if they are commercially aware, will demand approval of variations submitted on a monthly basis and will not accept payment on account.

Failure by the principal to do so will inevitably generate disputes.

In summary, while the bill contains some positive measures, it is not a complete answer to the woes of an industry that is the barometer of the economy.

It needs to take a further step and legislate for a standard form of security that starts at source - i.e. with the principal to the contract.

Contractors are more often than not required to provide a performance bond in the form of an on-demand bank guarantee to principals in the event of their non-performance or financial failure.

This has filtered down in recent times from some contractors to subcontractors.

But it is all one-way traffic, and until principals are obliged to provide similar security to contractors and their subcontractors, this bill will remain a partial solution to a much wider issue.

* Evan Geeves is project manager for the Waitemata Health redevelopment valued at over $100 million. He has an extensive construction industry background, including 17 years with Lend Lease and two years with Carson Group as project manager for the Auckland Museum redevelopment.