Big changes to common construction contract

New Zealand’s standard contract for the construction of building and civil engineering projects has been revised and released for consultation

The NZS 3910 is the contract most commonly used in New Zealand’s construction industry. However, recent industry and government reports have pointed to significant issues with the contract’s use that may erode relationships between clients and contractors. Such relationships play a critical role in driving construction sector productivity as well as value-for-money in public sector infrastructure spending (around $10 billion each year).

“There’s been overwhelming consensus from the construction sector that the contract needed a comprehensive update”, says Tracey Ryan, co-chair of the Construction Sector Accord.

“The proliferation of special conditions of contract that are often added to address shortcomings in the standard contract was a big focus. The fairness of some special conditions and the continual fiddling with the standard contract has caused big problems for the construction industry.”

In response, the New Zealand Infrastructure Commission, Te Waihanga and the Construction Sector Accord jointly commissioned a comprehensive revision of the contract with support from many within the sector. Standards New Zealand was appointed in late 2021 to lead and manage the revision process, which was done by a committee of representatives from across the construction sector.

This review of 3910 is the biggest revision the contract’s had since 1987, and the draft version of the revised NZS 3910 is now out for consultation.

“This revised contract aims to bring NZS 3910 in line with the current legislative environment and market conditions,” says Accord co-chair Andrew Crisp.

“The goal is a balanced contract that is fair and reasonable for all parties. This is expected to reduce some need for parties to insert their own lengthy and complex special conditions and help ensure that the contract is fit for the industry in 2023 and beyond.”

The revised contract is only a tool, however, and its use must be accompanied by a major culture shift, says Ross Copland, Chief Executive of the New Zealand Infrastructure Commis- sion, Te Waihanga.

“While these updates to NZS 3910 are an important enabler of better construction relationships, I want to emphasise the importance of a cultural shift in our industry from a mindset of contractual ‘winners and losers’, to one where public and private client-side leaders champion fair risk allocation and strive to eliminate, manage or accept some risk, rather than just transferring it.

“In order to rebuild a strong domestic construction industry and attract the talent we desperately need the sector needs to be profitable, fair and sustainable. Over the past decade we have seen far too many leading New Zealand construction firms fail and clients are most certainly worse off as a result. Client behaviour will make the biggest difference, so I’m asking our construction industry leaders to take this opportunity to think about their contract and procurement processes and become champions for better contracting practice”.

The consultation document with the proposed revised standard form contract is now available on Standards NZ website and consultation on it closes on 30 June 2023. All feedback needs to be submitted through the Standards NZ consultation tool.

Register here for a webinar to hear from some of the review committee members on the key changes.

Why are the Construction Sector Accord and Te Waihanga involved?

A 2018 report by consultancy Entwine identified significant issues with public sector procurement and contracting of major in- frastructure projects which impacted the construction sector.

Following this, the Government and industry signed a Construction Sector Accord in April 2019, acknowledging the challenges facing the sector and signalling a shared commitment to transform it. This included a commitment to a more visible pipeline of work and procurement practices that are fair, efficient and predictable. A guiding principle for the Accord is the building of trusting relationships.

In February 2019, the Government announced it would establish the New Zealand Infrastructure Commission, Te Waihanga to help improve how New Zealand coordinates and plans its infrastructure, makes the most of the infrastructure it already has, and ensures that investment in infrastructure delivers what New Zealand needs.

The Accord and Te Waihanga are working to improve how government and the private sector work together to build public infrastructure. Their joint commissioning of the NZS 3910 revision is one example of this work.

What is the NZS 3910 review working to address?

Some key things raised in the Entwine report that this review is aiming to address include:

– Large numbers of special contract conditions effectively make contracts bespoke and these are often not reasonable or well understood by both the public sector and industry. These modifications, along with the use of unfamiliar contract terms, can lead to misunderstanding, confusion, and ultimately, litiga- tion.

– Specific concerns regarding special conditions that are becoming more common in public sector construction contracts relate to the use of time bars, the lack of liability caps, and the impartiality of the role of the Engineer to the Contract.

– Risk should sit with the party best placed to manage it. The common aggressive approach to risk transfer often means that all risk sits with the contractor. Contractors may also face ‘risk transfer by stealth’ where risk is transferred through appended contract documents such as design specifications. This is not sustainable.

Why is this so important?

In 2019, the construction sector contributed seven percent to New Zealand’s GDP and employed 10 percent of the national workforce. A thriving sector is vital to New Zealand’s social and economic wellbeing. Additionally, the public sector is a major client of the construction sector, spending around $10 billion a year on procuring infrastructure – an amount that could increase significantly in coming years, as we work to address the infrastructure gap identified in Rautaki Hanganga o Aotearoa New Zealand Infrastructure Strategy. Given such investment, it’s vital that New Zealanders get the best value from this public spending.

Timeline for: Conditions of Contract for Building and Civil Engineering Construction (NZS 3910) lished following a major revision of its predecessor NZS 623.

2003 – contract updated to align with Construction Contracts Act 2002. 2013 – contract underwent a limited scope review.

2018 – report by Infrastructure New Zealand identified significant issues with public sector procurement and contracting of major infrastructure projects.

Creating Value Through Procurement: A Report into Public Sector Procurement of Major Infrastructure Projects (Entwine, 2018)

2019 – report by Treasury Infrastructure Transaction Unit found a ‘culture of mistrust’ between public sector (clients) and private sector (contractors). And that this results in lots of special conditions that modify standard construction contracts and lead to misunderstanding, confusion and, ultimately, litigation. It also found a number of related issues.

An examination of issues associated with the use of NZS Conditions of Contract (Treasury Infrastructure Transactions Unit, August 2019)

2021 – Te Waihanga and the Construction Sector Accord jointly commission the revision of NZS 3910 as part of addressing issues raised in the 2019 report. The revision is carried out by a committee appointed by Standards New Zealand and that represents the range of industry and client interests.

9 May 2023 – revised NZS 3910 contract out for consultation.

30 June 2023 – consultation closes.

October 2023 – Standards New Zealand aims to release the final NZS 3910:2023 contract.

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