The new wide-ranging Government Procurement Rules came into effect on 1 October and use the government’s annual procurement spend to achieve better public value
New procurement rules to help construction companies
New government procurement rules will help keep construction companies afloat by promoting better practices when awarding multi-million-dollar construction projects.
Economic Development Minister Phil Twyford says the ‘lowest price model’ approach used across the sector has resulted in construction companies cutting
costs and undercutting each other so intensely that some projects have become financially unviable.
“In the worst cases, companies collapsed before construction was completed, resulting in subcontractors not being paid. The new rules move away from this ‘lowest price model’ to a ‘broader outcome model’ which has to take into account the financial health of the construction company, the health and safety of its workers and the environmental health of the building,” he says.
The new wide-ranging Government Procurement Rules came into effect on 1 October and use the government’s annual procurement spend to achieve better public value, by targeting ways to improve cultural, social, economic and environmental outcomes.
The rules refer to the new Construction Procurement Guidelines which require government departments to consider factors including skills development and training undertaken by construction companies and their subcontractors, whether there is strong governance over the project, and sustainable building practices such as using sustainable materials and minimising waste.
Building and Construction Minister Jenny Salesa says the new guidelines help address some of the key concerns raised through the Construction Sector Accord – a commitment between industry and the government to improve productivity and address the challenges faced by the construction sector by building capability and resilience – including a focus on the whole-of-life public value and reducing financial risk.
“We are helping boost the resilience of construction companies by being more transparent in contracting about what risks exist and who is liable for managing them. This allows for fairer pricing, fairer margins, and less likelihood of unexpected financial shocks. It considers the whole-of-life value to the public of construction, not just the initial costs,” she notes.
“This initiative is part of the government’s comprehensive plan to address the long-term challenges the sector faces through lasting system and behavioural changes. Government contracts make up 18% of all large-scale construction projects,” Ms Salesa adds.
A new era for construction
Civil Contractors New Zealand (CCNZ) chief executive Peter Silcock says that if the new procurement guidelines and rules are properly implemented with agencies held accountable, it could signal a new era. “For a long time now, the focus has been on lowest cost. Agencies will now be required to change their procurement to focus on outcomes rather than cost, placing more emphasis on fair allocation of project risk to those best placed to manage it.”
CCNZ chief executive Peter Silcock: “An increasing focus on partnership and a sustainable construction industry are in the interests of all parties involved and are likely to lead to better results for projects, companies and communities”
Mr Silcock says the new guidelines require agencies to limit or justify any use of special conditions – a move away from lengthy additions to ‘standard’ construction contracts, which sometimes added hundreds of pages of special terms requiring complex legal interpretation. “Clients think they are managing risk by deviating from standard contracts. In some cases, they create it. Moving away from this should bring the costs down as clients, contractors and lawyers won’t have to spend time poring over hundreds of pages of special conditions.”
He says the new guidelines align with the principles of the Construction Sector Accord, and that because of this, interpretation is also important. “The guidelines provide agencies with practical interpretation for different business models, from strategy and market engagement to risk management and improved skills and training to ensure a skilled future workforce.”
Mr Silcock says that while the threshold requiring a specific skills and training development plan is too high at $50 million, its inclusion places greater emphasis on skills and could be adopted in smaller projects too. “Factors such as involving contractors early in project planning to ensure a sound business case would also make a positive difference.”
He says shifting the focus from cost cutting will provide more value for money in the long run. “For instance, greater emphasis on skills development planning would improve project quality, potentially also reducing cost by making it easier to find skilled people.”
Mr Silcock says many of the new rules are optional for local government, but he would like to see increasing uptake amongst councils. “An increasing focus on partnership and a sustainable construction industry are in the interests of all parties involved and are likely to lead to better results for projects, companies and communities.”
Better allocation of risk
Registered Master Builders Federation has also welcomed the new guidelines, with chief executive David Kelly saying the construction sector has been calling for fairer contract terms and better allocation of risk for some time.
“For a number of years, construction contractors have been asking for change in how some government agencies procure. We strongly support the release of the new guidelines, which have the potential to significantly improve the quality and consistency of how government construction projects are delivered,” Mr Kelly says.
“It’s unsustainable for government agencies to drive contract prices down and pass an unfair amount of risk onto the contractor. All this does is create an adversarial relationship and a culture of mistrust between parties, as well as leaving contractors potentially financially vulnerable. The new guidelines provide an opportunity to reset this culture by having agencies and contractors working more collaboratively to achieve fairer contract and risk allocations when delivering projects.”
The New Zealand Institute of Building (NZIOB) echoes these thoughts, with chief executive Malcolm Fleming saying the new guidelines mark a very positive shift in the way government agencies evaluate design consultants and contractors who are bidding for government building work.
“We appear to have moved away from the ‘lowest price is best’ model that has become an embedded practice, one which has led to poor outcomes for the construction sector and the built environment alike. For some time, the NZIOB has been drawing attention to the strong link between the current low-margin/high-risk environment, and the sector’s lamentable low productivity rates. In the NZIOB’s view, the twin issues of poor productivity and low profitability feed one another – i.e. companies that have poor productivity will naturally struggle to be profitable, while those who are not profitable will find it difficult to invest in innovative processes and technologies that will raise productivity.
“To break the cycle, we need to shift our procurement practices to those that promote innovation adoption, encourage the consideration of early contractor involvement, be transparent and fair about risk transfer with the construction supply chain, and encourage procurers to evaluate construction projects through both capital expenditure and operating expenditure lenses. We need to adopt ‘whole of life’ evaluation models. The new procurement guidelines do this, reflecting the shift in approach that the construction sector has been asking for.”
The Construction Procurement Guidelines are available here