A Fair Contracts Act for the Building industry. (Australian and NZ Readership)
By Professor Kim Lovegrove FAIB
Construction insolvency and building project stress is often causes by 3 factors, work drying up, tight margins and contractors entering into oppressive contracts. When there is a construction industry downturn developers often become ruthless as they capitalise upon high demand for jobs on the part of builders and low supply of projects. Developers invite builders to tender on what are parochially called “take it or leave it contracts”, if you don’t like the contract then leave it. It’s a bit like third world prison rations, consume the unpalatable, repugnant, meagre portions or die.
If contractors sign up a ‘take it or leave it contract”, they subject themselves to what could only be described as oppressive terms of trade. Typically the contract migrates all of the risk to the contractor. The profit margins tend to be meagre along with the ability of the contractor to claim time extensions. We had one matter that went to court where a contractor could only claim time extensions for extensions sanctioned by a superintendent, in itself not surprising. But when one considers that conventional grounds for claiming time extensions in particular events that were tantamount to act of god events were all excluded, the contractor was compelled to rely upon the superintendent’s largess and benevolence, qualities in short supply in the building industry. When a force majeure event materialised that caused months of delays the contractor was denied the ability to claim time extensions and liquidated damages were brought to bear.
This problem is not isolated, the building industry is littered with the corpses of contractors that signed up oppressive contracts that subsequently went off the rails because the contracts were never tenable in the first place. If the building industry allows an oppressive contracting culture to prevail then insolvencies will continue, particularly when economies contract and contractors; be they builders, subcontractors, or suppliers will all go to the wall. Free marketeers will chime, “too bad, let market forces prevail. The problem is when large contractors fail on account of oppressive contracting conditions many actors in the construction food chain are affected; the NZ Mainzeal Collapse is case in point. In the building industry insolvency calamity tends to flow down the line to subcontractors and suppliers, and when the head contractor topples everyone topples in its wake.
A Fair Contracts Act would impose compulsory risk sharing for principals, builders, sub-contractors and the like. Such an act would outlaw the ability of a contracting party to visit losses upon an innocent a party for losses occasioned by unforeseen events, events that could not have been envisaged by the contracting parties. There would also be mileage in establishing a regime where there is third party certification of payments on projects. The third party would be a discrete class of professional appointed to inspect and certify payment with the view to ensuring that, that which is owed to contractors does in fact find its way to the legitimate destination. The current system where a superintendent or architect may from time find themselves captive of the principal can lead to disingenuity and payments being withheld. Those with quantity surveying qualifications would be well suited to the task.