Legal Updates

A lifeline for the construction industry? New procurement rules announced

An industry in distress

New Zealand’s construction industry is growing rapidly. In recent years, the industry has used a ‘lowest price model’ approach when awarding construction projects. This has led construction companies to cut costs and under cut each other to secure tenders.

This practice has resulted in significant players in the industry collapsing. For example, Mainzeal Property and Construction collapsed in 2013, owing $110 million to creditors. Eberts Construction was liquidated in August 2018, leaving debts of over $108 million. In the worst cases, construction companies have collapsed before projects were completed, resulting in sub-contractors going unpaid.

Lowest price buying model for construction contracts ditched

Government contracts make up approximately 18% of all large scale construction projects. Pressure has long been building on the Government to lead by example and consider the commercial viability of contractors prior to awarding projects.

The Government’s new wide-ranging Procurement Rules (“the Rules”) came into effect on 1 October 2019. In particular, the Rules refer to new Construction Procurement Guidelines (“the Guidelines”) and are mandatory for 130 government agencies, applying to new construction projects with an estimated value of $9 million or more (excluding GST).

The objective of the Guidelines is to help keep construction companies afloat and ensure the quality of the built environment with a move away from a ‘lowest price model’ to a ‘broader outcome model’. As such, the Guidelines are designed to ensure agencies only award contracts to construction companies which:

  1. Have strong management in place;
  2. Incorporate sustainable construction practices, such as using materials that minimise waste;
  3. Offer the best value to the public over the whole life of the building; and
  4. Are willing to invest in upskilling staff, hiring apprentices, and improving worker conditions.

This means that when evaluating construction companies’ bids for projects, agencies must now complete due diligence by taking into account the above factors, rather than simply choosing the bid with the best price.

Effect on construction companies

To secure bids under the Rules and Guidelines, construction companies will now need to improve how their business is run by identifying risks, evidencing compliance, upskilling staff, investing in sustainable materials and pricing bids accordingly.

Hon Jenny Salsea, Minister of Building and Construction, believes the Rules and Guidelines will help “boost the resilience of construction companies by being more transparent in contracting about what risks exist and who is liable for managing them.”

The Rules and Guidelines are key to the Government’s effort to deliver better public value and services. This is a positive step for the construction industry and demonstrates that the Government acknowledges the difference between the lowest price and value for money, and ultimately supports agencies taking a whole-of-life approach to construction rather than just securing the cheapest price.

If you have any questions relating to the Government’s Rules or Guidelines or would like assistance in ensuring your company has the best chance to secure a bid under the Rules, please contact Jaesen or Jono.