Golden era of construction

by Hannah Norton27 Apr 2016
In 2014, Building and Housing Minister Dr Nick Smith predicted “the biggest construction boom this country has seen in decades” – with a projected total value of $100 billion over the next three years.

His comments came off the back of a Government-commissioned National Construction Pipeline report - and, according to New Zealand’s construction lawyers, they are proving to be true.

“We have certainly noticed this and we believe the key factor driving this boom is New Zealand’s economic and political stability over the past years - especially when compared to Australia,” says Joe Biddles, director at Thompson Blackie Biddles.

“We believe this has resulted in local businesses feeling confident to build and foreign investment being attracted to invest. This is coupled with council’s investment in infrastructure.”

Russell McVeagh’s construction practice had a very busy 2015 working on several large construction contracts with construction prices of hundreds of millions of dollars, partner Ed Crook says.

“There is a high level of confidence within the private sector with many areas of New Zealand's economy enjoying good growth. This has supported the development of new CBD offices, retail and industrial developments.”

There seems to be confidence that the economy generally, and tourism specifically, will support the New Zealand International Convention Centre once complete in 2019, Crook says.

“There also continues to be a number of large infrastructure projects, particularly around Auckland, to support Auckland's transport requirements.”

Bell Gully partner Tom Bennett echoes these sentiments.

“There is increased construction activity generally, but in particular for projects where clients are using external legal advisors.
“This is usually because of the high value of the project - either in terms of contract price or commercial importance to the client - or complexity of the project. Increased construction activity is across all areas - residential, commercial and infrastructure projects.”
Anthony Harper property partner, Edward Dunphy, believes the boom is being fuelled by both the private and public sector.

“From the private sector we are seeing that the timeframes for responding to tenders is getting shorter as private clients are keen to get started on projects as soon as possible in order to get products to market before it slows down.

“The public sector drivers appear to be driven by a number of factors: the Christchurch rebuild is still going strong; there is also a sense that spending on large infrastructure projects is a good way to keep the economy stable; there seems to be a concerted effort by central government to have a clear and consistent pipeline of work; and some of the recent decisions by the public sector seem to have been made with a view to encouraging and supporting private development.”

Key drivers of work

The work undertaken by Russell McVeagh’s property team is predominately with private sector developers, Crook says.

“[This] has included Precinct's developments at the Downtown Shopping Centre and Wynyard Quarter, Goodman's developments in the Wynyard Precinct, and the ongoing development by Auckland Airport of its terminal buildings and business park.”

Minter Ellison Rudd Watts has experienced a number of drivers of work in both the contentious/disputes side of construction as well as the non-contentious/contract and project advisory side, partners say.

Minter Ellison Rudd Watts partner Janine Stewart observes “an increasing willingness to get lawyers involved in disputes more than ever before - not litigation but also other forms of dispute resolution, and even proactive ‘pre-litigation’ strategy and preparation to seek to avoid disputes or seek to make claims or positions as ‘litigation-proof’ as possible.

“The reasons for it include the larger projects, and therefore sums involved, as well as more personnel or companies from more litigious jurisdictions coming into the sector."

There are also project disputes and disputes around latent defects in completed works, which she describes as “an ongoing legacy of changes in the industry”.

“These include changes in building laws, materials, methods, and training.”

Fellow Minter Ellison Rudd Watts partner, Mark Crosbie, lists some key drivers of work as: the Christchurch rebuild “particularly the anchor projects”; the convention centres in Auckland and Queenstown, as well as Christchurch; the public sector’s release of PPP projects to the market; the Auckland office market expansion with new office buildings, and retail sector with shopping centre developments and expansions; and the Auckland residential market, particularly new apartment buildings.

“This, in addition to a good level of corporate requirements - offices, factories, warehouses, etc, reflects the relatively buoyant economy.”
These drivers have meant the firm has noticed a clear construction boom, Crosbie says.

“There is a foreseeable pipeline of forward construction work as well on the basis of those factors alone.

“For the front end lawyers, a lot of the work takes place early on - before the physical work on the project starts, and so our role has finished on a lot of the projects that the public is now seeing underway, and we are working on the next projects that are yet to get underway.”

Bell Gully’s Bennett emphasises the importance of the state of the economy in the construction space, particularly for the private sector.
“Clients respond by either building new facilities or enhancing existing facilities, or undertaking commercial or residential development,” he says.

“Examples of recent work in Auckland include the Northwest shopping centre, Britomart precinct, 125 Queen Street redevelopment and the Commercial Bay/City Rail Link development.”

Public sector projects Bell Gully has worked on have included the Auckland City Rail Link, the Government’s continued Public-Private Partnership (PPP) programme and the identification and development of Special Housing Areas.

Biddles notes activity in the construction sector in both Christchurch and Auckland.

“The continued activity in Christchurch in undertaking the rebuild has seen high levels of construction activity resulting in several development projects.

“In Auckland, as land supply continues to be unlocked, there has been considerable activity in the development of bare land into residential lots/subdivisions. Residential conversions of CBD and CBD fringe buildings have also been a feature, alongside commercial office construction in the Auckland CBD.”

Dunphy says work is being driven by a mix of things – “the volume of work that is out in the market place, the complexity of the contracts and the way risk is being allocated”.

His Anthony Harper colleague, partner Karen Kemp, says that in the disputes space clients are thinking more commercially about their potential claims, and are using the efficient mechanisms under the Construction Contracts Act for quick, practical results.

Legislative changes

It has been a relatively intensive period of legislative reform for the construction sector, Russell McVeagh partner Polly Pope says.
“We have noticed particular engagement from our clients in the substantial reforms to health and safety laws.

Wide-ranging reforms to the Construction Contracts Act were also passed in 2015, she says.

“One area that has perhaps received less focus is the requirement to hold retentions on trust.  There are a number of issues that will need to be worked through in practice, in particular in the insolvency of the party holding retentions.”

Dunphy also believes this is having a potentially large impact on the industry.

“It is expected that some more details around the holding of retentions on trust will come via regulations during the year, so quite how it will impact the industry remains to be seen.”

Biddles notes the amendments to the Construction Contracts Act and Health and Safety legislation, adding reforms/changes include new and significant consumer protection measures under the Building Act, which came into effect in January 2015.

“These changes have driven up compliance costs but also lead to a more positively-regulated industry.”

Bennett says the industry does appear “to be taking these reforms in its stride, although the new framework for retentions may result in

Challenges in the construction sector

The key challenges, at least around the Auckland area, are continuing upward pressure on materials' pricing and a lack of capacity and resources within the sector, and in particular, amongst subcontractors and suppliers, Crook says.

“On some occasions, we have seen difficulty with developers being able to progress a competitive tender process to include a fixed price or good manufacturing practice (GMP) because contractors are already busy and are not prepared to commit time and cost to pursuing an opportunity in a competitive environment.”

One solution for this has been for developers to tender on a margin and P&G (preliminary and general) basis and for sub-trades to be procured on a transparent basis, Crook says.

“This means that the developer takes the risk on sub-trade pricing and so may not be suitable for some developments. High pricing has also meant that some projects are no longer feasible.”

Crosbie says there are two conversations around challenges that the team is hearing on projects at present.

“The first is in the procurement of a project team (consultants and contractors) and with some price certainty – there are a limited number of consultant practices and construction companies that are geared up for large projects and with so much work on the demand is exceeding or at least stretching supply,” he says.

“Even those companies have a limited number of senior people with the experience and expertise to lead a large project. This is thus limiting options for owners/developers and leading to necessary consideration of alternative procurement (such as off-shore contractors).”

The second, and somewhat related, issue is the size of the supply chain - the suppliers and subcontractors that supply the materials or do the trade-work on the project, Crosbie says.

“That pool was relatively limited coming out of the GFC, and was then hit hard by the likes of the Mainzeal collapse, which caused failure or stress for many such companies.

“So the limited capacity of this supply chain to actually meet the demand of this increasing amount of work is also giving rise to concerns about impacts to projects for both the owner/developer, as well as for the head contractor.”

Again off-shore supply of both materials and labour is a consideration, but comes with a further set of risks that need to be managed, or that make the theory of such a solution impracticable in some instances, Crosbie says.

“The outcome of all this can lead to or exacerbate delays, cost increases, and/or quality outcomes, all of which in turn can lead to dispute.
“Whilst referred to in the context of large projects, we are starting to see the same issues arising – at least in Auckland – in relation to the medium- scale projects, as well with the consultants and contractors that service those projects.”

Stewart adds that, in addition to Crosbie’s comments, the firm is seeing parties rush into the next project without properly allocated risk and structuring the project.

Kemp believes the main challenge for the sector will continue to be keeping projects on track, managing the time pressures that the boom will create, and ensuring clear contractual arrangements are put in place with appropriate risk allocation.

“No one involved in a project wants the distraction of a dispute or to be on the wrong side of a contract issue.”

Another key challenge for firms is recruiting and retaining quality and experienced construction lawyers, Bennett says.

“This is because of the cyclical nature of the construction industry and the current high levels of construction activity in Auckland and throughout New Zealand.

“Good, skilled people are, quite rightly, in demand.”

And, as the golden era of construction continues, this is likely to be an ongoing trend.