Government must address risk transfer, according to construction industry experts

The New Zealand Institute of Quantity Surveyors (NZIQS) is calling for government to address the issue of risk transfer in construction industry contracts.

The President of NZIQS, Barry Calvert, says that construction risk transfer is a major issue that must be addressed before it creates further problems within the industry.

“The situation with Fletcher Construction Building & Interiors is a clear example of the dangers of ignoring this.”

According to Mr Calvert, risk transfer away from the client and onto both contractors and consultants has reached inequitable levels and puts significant and unnecessary pressure on the contracting parties.

“That means construction projects are likely to be more expensive than necessary, and when things go wrong it can lead to situations like the one Fletchers is in. These outcomes are due in part to issues such as construction risk not being managed as well as it could be. 

“While Government procurement agencies are not the only clients to impose inequitable risk transfer provisions in major construction projects, they are a major contributor to the problem.”

Mr Calvert says experienced contractors face the dilemma of remaining competitive at the same time as having to make monetary allowances for the risks they see in the tender documents. 

“But in some cases, naïve builders are signing contracts with all their associated risks that could cause them major financial losses if a risk actually materialises.”

NZIQS is urging Government to lead by example when tendering construction projects. 

“Government agencies must either accept more risk or be prepared to pay the full and reasonable price for risk transfer. We are looking for more equitable and realistic risk profiles within construction contracts,” Mr Calvert says.

“In turn, industry must step up and become more professional and sophisticated when it comes to accepting risk and entering into contracts.” 

The Institute also says there must be more focus on whole-of-life costs when commissioning construction projects.

“The ongoing operating costs of a facility dwarf the costs of design and construction but are often not considered or prioritised as they should be.

“Understanding these costs and addressing them at the design phase would have significant long-term financial benefits for building owners and operators, including Government tenants.”

NZIQS outlined its views in its Ministerial Briefing.