The Government introduced new procurement rules for its major projects yesterday, moving from the “lowest price” approach to construction to the “broader outcome” model.
Economic Development Minister Phil Twyford and Building & Construction Minister Jenny Salesa said the new Government rules will come into force tomorrow.
They said the new rules “will help keep construction companies afloat by promoting better practices when awarding multi-million-dollar construction projects”.
Mr Twyford said the “lowest price model” approach used across the sector resulted in construction companies cutting costs and undercutting each other so intensely that some projects became financially unviable.
“In the worst cases, companies collapsed before construction was completed, resulting in subcontractors not being paid.
“The new rules move away from a ‘lowest price model’ to a ‘broader outcome model’, which has to take into account the financial health of the construction company, the health & safety of its workers and the environmental health of the building.”
The new guidelines which require Government departments to consider factors including skills development & training undertaken by construction companies & their subcontractors, whether there is strong governance over the project, and sustainable building practices such as using sustainable materials & minimising waste.
Institute of Building welcomes procurement change
The Institute of Building welcomed the change. Chief executive Malcolm Fleming said yesterday: “For some time, the NZIOB has been drawing attention to the strong link between the current low margin/high risk environment and the sector’s lamentable low productivity rates.
In the institute’s view, the twin issues of poor productivity & low profitability feed one another – companies that have poor productivity will naturally struggle to be profitable; while those who are not profitable will find it difficult to invest in innovative processes & technologies that will raise productivity.
“To break the cycle, we need to shift our procurement practices to those that: promote innovation adoption, encourage the consideration of early contractor involvement, be transparent & fair about risk transfer with the construction supply chain, and encourage procurers to evaluate construction projects through both capital expenditure & operating expenditure lenses – in other words, adopt ‘whole of life’ evaluation models. The new Government construction procurement guidelines do this, reflecting the shift in approach that the construction sector has been asking for.”
Multiple issues being addressed
The ministers said the guidelines change was one of many initiatives underway to address major challenges facing the construction sector. These included:
- The construction sector accord, a commitment between Government & industry to transform the sector by driving the right behaviours through a sector-wide mandate, and
- The construction skills action plan, which specifically addresses issues around skills & workforce and aims to deliver the right people at the right time, with the right skills, to meet New Zealand’s construction needs.
The construction sector is New Zealand’s fourth largest employer, providing work for nearly 250,000 people. The ministers said: “The industry is characterised by multiple long-term issues such as skills & labour shortages, poor risk management, unclear regulations & pipeline and a lack of co-ordinated leadership, which have never previously been cohesively addressed.
“The construction procurement guidelines were originally released in 2015 and have been updated. The update includes providing guidance related to the broader outcomes work programme, which prioritises use of the Government’s annual procurement spend to achieve better public value for money, by targeting ways to promote better cultural, social, economic & environmental outcomes.”
Attribution: Ministerial & NZIOB releases.