Even with lockdowns a distant memory and a declaration that life was back to normal in 2022, 2023 has nonetheless still had a “crisis feel” to it. Caitlin Hogan and Brendan Cash, Dentons, discuss what can be learnt from the past 12 months for this coming year.
Weather events caused over $9 billion in damage according to the Treasury, and raised questions about how robust our infrastructure is to cope with severe weather events in the future?
The year involved immense efforts by members of the civil construction industry, working in emergency conditions and often without confirmation they would be paid, to help the regions get back on their feet. Those efforts have hopefully been well appreciated but will have placed a strain on the industry at the very start of what turned into quite a wet year.
It has otherwise been a year where you could not read a paper, listen to the radio or turn on the news without hearing about the “cost of living crisis”. Inflation was high and while it has come down, it has not come down enough. Between the Reserve Bank and the financial markets, interest rates have continued to rise and consumer spending in many areas has continued to decline, as people have tightened their grips on their wallets.
International uncertainty has not helped. There were concerns about a US banking crisis earlier in the year and those concerns have not entirely dissipated. Key financial markets went up over the first half of the year and then declined, sparking concerns that a deeper market crash could be on the horizon.
So against that background, how have we fared?
Among our predictions for 2023 were major insolvencies in the sector, in the context of a predicted recession by the Reserve Bank.
At one point of the year, we were considered to be in a recession, but revised figures indicated we narrowly avoided one and there have been some quarters with surprisingly strong growth.
There has not been one dominant insolvency in the wider sector (like Mainzeal in 2013), but 2023 was a story of increased insolvencies. For example, a quarterly report released by BWA Insolvency at the end of August 2023 noted that construction had the highest number of formal liquidation proceedings in the second quarter, up 78 percent year-on-year.
The residential development and housing sector was particularly hit, as demand dropped and margins reduced. Stats NZ data show in the year to September 2023, 20 percent fewer new homes were consented.
So, as we predicted, it was a year where it was important to have the business basics sorted – keeping costs under control, pricing jobs right and administering jobs so cash flow was maintained.
From what we have seen, some collapses happened because, in the fight to maintain cash flow, project jobs had been significantly under-priced and that has eventually caught up with the business and the owner.
In these circumstances, the lessons to be learnt by directors from the Mainzeal decision released by the Supreme Court in August 2023 are important. We wrote about this decision in a previous edition of Contractor.
Directors owe a duty not to trade recklessly and not to incur an obligation unless they believe on reasonable grounds the company will be able to perform. The Supreme Court found that the directors of Mainzeal breached these duties and were liable to pay $39.8 million when they continued to trade Mainzeal while insolvent.
If a company can’t be salvaged, don’t trade on – take advice and consider the appointment of administrators or liquidators. Courts will allow a reasonable time for directors to take stock and decide what course of action they should take, and directors will not normally be liable for trading during this period.
However, keeping a zombie company running for an extended period risks liability under these provisions.
An environment where counter-parties are at greater risk of failing means the protections offered by the Construction Contracts Act become more important. As we mentioned in last year’s Perspective, the later part of 2023 saw the revised regime in that Act to protect retentions come into force (from October 5, 2023).
This addressed the weaknesses with the prior regime by providing that retentions are deemed to be held on trust. However, parties should still be requesting information to confirm this.
However, a wave of immigration and supply chains returning to something closer to normal, as well as reduced demand, has seen some of the labour and material supply and pricing issues ease during the year.
Otherwise, 2023 will mark a significant moment for the industry, with the completion of the review of NZS 3910.
David Wilkie, Chair of the NZS3910 Conditions of Contract Committee, announced in November 2023 the updated contract had been approved by the Standards Board and published in time to add to the industry’s summer reading. While not as exciting as a Dan Brown best-seller, it will be an important read.
The contract is the mainstay of our construction industry and many of its obligations are often passed along the supply chain. The new version will likely have some significant changes, assuming the changes in the draft published for consultation mid-year survive largely intact. For example, that draft included the introduction of a new “Target Price” contract price mechanism, to allow for the sharing of cost under-runs and over-runs, the Engineer’s role being split into a Contract Administrator role and Independent Certifier role, and the indemnity being changed to be fault-based and with a cap on liability.
The year ahead
Further insolvencies are likely in the year ahead. Several high-profile insolvencies in Australia’s construction sector over the course of this year may well indicate similar for us this year, as the economic headwinds continue to hit parts of the industry.
Some may hit as early as this summer, as cash flow drops and tax liabilities loom.
The extent to which this occurs may depend on how our housing market does over the next 12 months. There has recently been signs of a market uptick and of first-home buyers returning.
However, interest rates remain high and we have seen construction projects not being pursued, as they cannot be justified or funded in the current higher interest rate environment.
The change in Government otherwise heralds changes in the year ahead.
National’s core policies in relation to infrastructure survived the coalition negotiations. National will repeal Labour’s Three Waters Legislation, the Fair Pay Act and the beginning of Labour’s RMA reform (Natural and Built Environment Act 2023) and otherwise start afresh with reform of the RMA.
Auckland’s Light Rail project and Wellington’s ‘Let’s Get Wellington Moving’ projects, both significant infrastructure projects, are also “binned”.
However, infrastructure investment remains a key policy plank. The coalition agreement with NZ First confirms the establishment of a new National Infrastructure Agency, which National envisaged would engage investors (onshore and offshore) and to also set out a 30-year infrastructure plan across all sectors.
The agreement with NZ First also commits to establishing a fast-track, one-stop-shop consenting and permitting process for regional and national projects of significance.
The coalition agreement with ACT provides for legislation making the ‘Medium Density Residential Standards’ optional for local body Councils, and allowing home builders to opt out from the building consent process (BC), the aim being to replace such consents with private insurance cover.
Given the amount of infrastructure work this country needs, added to and reinforced by the impact of the Auckland floods and Cyclone Gabrielle, the change in Government will not signal a shift away from investing in infrastructure.
Rather, it will means, we predict, a change in what projects they focus on and how they are funded.
For example, there will clearly be a much greater focus on roads. National’s ‘Transport for The Future’ policy identified roads of national significance across the country.
The coalition agreement with NZ First commits to building a four-lane highway alternative for the Brynderwyn Hills in Northland.
That agreement includes exploring the use of private finance to accelerate construction. Again, that is consistent with National’s pre-election signals that it wants to use alternative delivery and funding models, such as PP.
In all, an interesting time ahead as usual. Our regular legal update column can be found in every issue of Contractor magazine.
Parting words from Jeremy Sole- a final column