Construction industry woes: a follow-up

A need for changed attitudes or the industry will split into two

By Derek Firth

In this follow-up opinion I ask why many contractors have been bidding on silly terms; and predict that the industry may split into two.

Further to the earlier examples of draconian clauses, many readers have provided me with numerous further examples of grossly unfair conditions. Furthermore, these unrealistic burdens are consequentially imposed on subcontractors by head contractors.

May I dispel any thought that I am being unduly contractor friendly. I have been very vocal against draconian clauses in my advice to owners for over 30 years because they do not benefit from them in the long term. This is because good contractors will load their price to cover the extra risk (and often miss out) and less responsible contractors will take those risks and either try to bring unjustified claims for extras to compensate or perhaps not complete the job (with disastrous consequences for the owners).

One might ask, why do contractors take these risks when they have the option of not tendering? The simple answer lies in the billions of dollars which they have tied up in plant, equipment and personnel. So, is it good business for the owners to take advantage of that to get the lowest possible price? Some probably think so, but that really is a short-sighted view. It is one reason why there is now a shortage of sound contractors when the industry should be booming.

This crucial point can be illustrated by reference to the larger projects. When tenders are invited for large projects, the owner will always insist on bidders with strong balance sheets. They will reject anyone without one. But how does a pool of bidders with strong balance sheets become available when most owners will do everything they can to ensure that the bidders for their project will not benefit appropriately from it. There is no difference in principle with builders of houses, factories, hotels, apartments or anything else. There must be a shake-up in thinking.

Some owners and their consultants understand that a vibrant and sustainable construction industry is to their advantage, but why does the majority not “get it”?

My prediction is that the industry will eventually split into two.
Financially sound and good quality contractors will largely pull back from bidding. They will negotiate on fair and reasonable terms with thoughtful owners who understand the problem, and the pool of good bidders will diminish even further. Penny-pinching owners who are obsessed with shaving the margins to a minimum will be left with bids from weak contractors who will accept unfair terms and minimum margins. It would be easy to say that they will then deserve each other but, sadly, that is of no help to the ultimate purchasers who may have to live with the consequences of builders who fail to complete. Owners and their consultants will have only themselves to blame.

The first person to publish “A Guide to Negotiated Construction Contracts”, with input from all sides, should do well.

This article was originally published in BuildLaw Issue 34. Click here to read it online. 


Derek FirthAbout the author

Derek Firth is an Auckland Barrister practicing as an arbitrator, mediator and adjudicator. He is a Fellow of AMINZ and a Fellow of the Chartered Institute, UK. Derek has had a number of party and Court appointments under the ICC Rules and is one of the leading dispute resolution practitioners in New Zealand, particularly in construction, property and commercial disputes.

Derek is the New Zealand Alternate Director of the ICC International Court of Arbitration (Paris) and has been appointed as Member of the New Zealand Order of Merit (MNZM).

He is Chairman of the Dilworth Trust Board, a Trustee of the Melanesian Trust Board; Chairman of BioDiesel Oils NZ Limited and a director of a number of companies in the InterTech Group in Australia.

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