It is the construction industry’s worst kept secret that sub-contractors largely fund activities until they get paid their retentions by contractors.

It should come as no surprise that when changes were made to the Construction Contracts Act in late 2015, everyone from principals to contractors and sub-contractors were left scratching their heads about what the amendments meant in practical terms for projects.

Months on, the ambiguity and uncertainty remains, but as the industry nears the 31 March 2017 date when all retention money must be held in trust, it is now non-negotiable to understand your obligations and the financial requirements of the Act.

BDO and MinterEllisonRuddWatts joint briefing

The White Associates team recently attended a joint briefing led by James MacQueen (advisory partner, BDO) and Janine Stewart (partner, MinterEllisonRuddWatts). Our clients and peers were invited to get under the skin of what the Construction Contracts Amendment Act 2015 means for New Zealand’s construction industry.

We spoke to Zoё Bashforth (Principal, White Associates) to get her takeaways from the BDO/MERW seminar and to get her views on how clients might use the new regime to win more work and redefine contract agreements.

Retentions, regimes and releases

Sparked by the collapse of Mainzeal, the CCA is intended to protect sub-contractors from going unpaid after a project concludes. It does this by encouraging retention funds to be held in trust by the contractor or principal until they are released to the sub-contractor upon practical completion of the project and fulfilment of its obligations to rectify any defects during the Defects Liability Period, or used for any remediation work in the event that it’s needed.

Sounds simple enough, doesn’t it?  Not so.

Making sense of ambiguity

Bashforth says:

“There are several ambiguities in the CCA Amendment 2015, such as whether the obligations will fall on contracts entered into prior to 1^st December 2015 and whether it will apply to retentions held up to and including 31^st March 2017. This will only be resolved through testing in the court, so it is prudent to err on the side of caution.”

Demonstrate your ability to hold retentions in trust, and win work

As the need to demonstrate the capacity to hold retentions in trust effectively grows in importance, contractors that can demonstrate to potential clients that they can do this will be the ones to secure new work under the new regime.

Because a critical element of the new CCA regime means that sub-contractors can demand proof from the principal or contractor that their retentions are in fact being held in trust, keeping good records and well-structured trust funds is paramount.

The key takeaway here is that in a construction environment characterised by ever-tightening procurement processes, contractors that can demonstrate their ability to hold retentions on trust will be the ones to win work over competitors who can’t prove this.

Preparation and decisions are key

“For us, the key takeaway is being prepared, whether you’re a principal, contractor or sub-contractor (if you further sub-contract out work). Decisions need to be made now, as to the manner in which the retentions are held and mechanisms need to be operational by 1^st April 2017.”

Zoë says accounting systems need to be assessed as soon as possible to review whether they have the capability to fulfil the inspection requirements of the new regime and decisions need to be made whether or not to co-mingle funds.

This was a point covered in the briefing, and the general view seems to be that it is advisable to keep retentions in separate funds so that they stand alone and can be easily accounted for and inspected, rather than co-mingling them and ‘muddying the waters’, so to speak, with different retentions being held for multiple sub-contractors or projects.

MacQueen and Stewart countered that principals and contractors should weigh up the burden of setting up separate trust accounts against the risk of non-compliance if you co-mingle those funds and can’t clearly and promptly identify which retention is assigned to which sub-contractor.

A new generation of contract agreements?

The new regime could well be the catalyst for an evolution of traditional contract agreements.

Zoë says:

“We may well see a new generation of head contract and sub-contract agreements with more provisions being back-to-back and a change in which the retentions are applied, such as moving away from sliding scales to a single percentage application with sub-contract retentions being aligned with main contract retentions.”

Thanks to BDO and MinterEllisonRuddWatts for the briefing, and to our clients and colleagues who attended the seminar. Click here to find out more information about the Amendment Act, and what it could mean for your current or upcoming construction projects.

The pressure is well and truly on for the development and construction community. Developers are seeing rising land prices, material prices are fluctuating, the labour force is stretched, and it’s putting increasing pressure on the feasibility of developments – as I’m sure you’ve seen in the media recently.

We are seeing clients across the development spectrum looking for the return on their investment and this is now largely dependent on early involvement from reputable contractors and the quality of procurement processes being used.

Contractors are no longer the ones leading the work: it’s a sub-contractors’ market. The projects and contractors that are most successful in the current climate are the ones who manage their subbies well. The contractors that don’t manage their sub-contractors well will see the impact on their project delivery and budget. Keep in mind that what worked for a project two to three years ago will not necessarily be effective today.

What are the takeaways from the current market situation?

• Plan your project beyond the construction phase
• Spend the time upfront on feasibility and due diligence before you take a project to market
• Embrace good design management early on
• Get your feasibility checked by a quantity surveyor

Wasting time is sacrilege in the development world, but the industry needs to adapt to the new market realities and get project feasibility checked before the spending starts. With the requirements of the amendments to the Construction Contracts Act becoming ever-more pressing and retention funds having to be held in trust early next year, there’s change in the air and those who don’t respond and act will get caught out.

There is a multitude of opportunities emerging for astute developers and contractors across all property types and throughout the regions. So, take the time to plan and fund your project and reap the rewards.

This article was published in the Feb/March 2016 Issue of NZ Construction News

Seismic Strengthening – Think Outside the Square

A leading quantity surveying firm says that last year’s regulatory changes to seismic strengthening timeframes and high-risk regions mean building owners need to start looking at alternative design options for remedial works and consider the opportunities of alternative use.

Justin Maritz, a principal of property and construction cost consultants White Associates, says that in order to get better seismic outcomes, building owners need to ask the question: can I do this differently? “The rules have relaxed, but building owners shouldn’t,” he says.

After the government came under pressure to amend the rules around seismic strengthening due to concerns about costs and uncertainty from building owners, and apprehension from those using heritage buildings that they’d be abandoned or demolished because of the previous guidelines, regions have now been split into higher or lower risk zones. The changes will see the number of buildings that need to be assessed drop from around 500,000 to 30,000.

Mr Maritz says that despite the relaxation of timeframes and categorisation of risk areas, there are still a significant number of buildings that require assessment and potential remediation. “Even in this new regulatory environment, planning early and thinking about options and the alternatives available are important for a long-term solution.”

Explore your options

Mr Maritz says limited information is the biggest challenge owners face when evaluating their properties. “In the early stages, having little information means it can be difficult for clients to tell their quantity surveyor (QS) what to price. White Associates is quite unique in that when we are involved from the start of a project, we can work with high-level reports from designers to provide high-level cost advice at an early stage of the process, which is of tangible value to our clients and something of a rarity in this market.”

He says that often a feasibility analysis will result in a building being demolished rather than being remediated or retrospectively upgraded – and that’s not always a bad thing. “I would encourage building owners to look at alternatives and different solutions, rather than simply choosing the path of least resistance. We’ve worked with clients who have decided on a complete change in the use of their building, and others who have embraced the blank-slate opportunity created with a demolition and rebuild.”

Early stage involvement

Mr Maritz says that White Associates is an active participant in the seismic strengthening process.”We are heavily involved in assessing the feasibility of seismic projects, from the earliest stage. In that early stage of design and due diligence, we can provide high-level costing estimates which can often influence the direction of the project itself,” he explains.

“From our initial involvement, we’ll stay with the project until it’s in the post-contract stage, meaning we can assist clients with their costs and bank funding through all phases of the project.”

One of the most significant seismic challenges ahead for building owners is insurance. Mr Maritz says that buildings under 33% of the new building standard (NBS) could face restricted ability to get insurance cover, and in some extreme cases, buildings under code will not be able to get any cover at all.

“Buildings with an NBS rating between 33% and 67% are also facing increased costs of insurance premiums, which represents a sizable portion of the market,” he notes. “When considering your options about insurance, it is worthwhile to consider what steps you will take if your building can’t be covered at all.”

Mr Maritz says the varied structures, alternative design solutions, working environment and methodology identified at feasibility stage have high levels of assumptions that can result in high-cost fluctuations depending on the final design solution and methodology.

White Associates works with the design team at an early stage to try and identify the cost of the different design solutions, providing the client with choices.

Use your muscle

An active development pipeline across the country means that newer buildings with higher NBS ratings are putting pressure on older stock, Mr Maritz continues.

“Landlords are coming under increasing pressure to comply with NBS ratings. With more new stock coming onto the market and in the works, older buildings with lower ratings are feeling the pinch. Tenants are looking for more reassurance and confirmation of a building’s earthquake adequacy, which creates lucrative opportunities for the owners of newer builds and seismically strong older buildings,” he adds.

“We’re already seeing landlords command higher rental prices for good-quality, seismically strong buildings, and that trend will continue for the foreseeable future as we see the different strengthening timeframes come into effect.”

He says buildings with a good NBS rating can attract and retain tenants far better than those with lower ratings. “Of course, a good tenancy arrangement includes a number of variables, including cost, lease term and incentives, but seismic strength is becoming one of the most critical elements.”

Delivering good value

While some building owners will view seismic strengthening as a necessary (but expensive) evil, Mr Maritz says that when done well, assessments and subsequent solutions can, in fact, be an opportunity to create new value while reducing the cost of the works.

“Building owners looking at assessing their properties should consider project partners who can offer good value and design management because seismic strengthening may be costly,” Mr Maritz concludes. “However, it can also be an opportunity to improve your investment, reduce costs and future-proof it as well.”

 

• We’re letting the inner fashionista shine, with a used clothing drive right here in the office. If you have any pre-loved, good condition clothing that you’d like to donate, please drop them off and we’ll take care of the rest.
• We’re running a Rugby World Cup sweepstake and tipping competition in which 40% of the winnings go directly to the Child Cancer Foundation.
• And best of all, we’ve got a fighting fit White Associates Team entered in the Auckland Marathon, with all donation proceeds going towards our fundraising efforts.

Next time you catch up with the White Associates Team, be sure to ask about how our fundraising for the Child Cancer Foundation is going!

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