By Jeremy Sole
CEO, NZ Contractors' Federation
I have mentioned previously that the Contractors’ Federation is engaging with a number of parties in a review of NZS3910. In the meantime the Auckland Regional Contracts Group (ARCG) has been engaging in its own review of the standard form of contract.
The industry has several concerns with the ARCG documents in that we feel some conditions are unfair and heavy handed, perhaps even to the point of being hostile toward the contractors. The industry voiced its concerns and it looked as though ARCG would modify or remove these clauses. However we are led to understand that their lawyers, Simpson Grierson, talked them into leaving the unbalanced clauses in place despite the contractors’ concerns.
Hopefully by the time you are reading this, some progress will have been made towards getting NZS3910 back to the balanced and reasonable document that was produced collectively by all industry stakeholders.
In the interim, I suggest that if you are entering into a tender or contract agreement with any of the Auckland councils using the ARCG version of NZS3910 that you look extremely carefully at the documents and ensure you fully understand what you are signing up to.
Sounds logical that you would do this anyway, however the whole point of having a standard form of contract is that you don’t have to go hunting with a magnifying glass, a Rubik’s Cube, and a lawyer to find the fish hooks. Of course this also applies to contracts put out anywhere in the country by local authorities. When you get a standard form of contract with 30 pages of variations your trust levels should instantly go down and your antenna should be completely up because, as sure as eggs, it is hostile toward you.
We had a member recently advise us of a local authority tender document where the conditions were so completely unreasonable that they felt it was “too dangerous” to even put a tender in. To quote Chris Olsen, CEO of Roading NZ, on the subject of the ARCG NZS3910 amendments: “Over the past 20 years there has been a huge improvement in local government contract administration and management. Practices that used to undermine the tender process have largely disappeared. This has contributed to New Zealand being recognized as one of the least corrupt countries in the world. It’s disappointing to see these practices reappearing”.
In the ARCG context, two of the clauses we are most concerned about are:
-
112.3: “The Principal may, acting reasonably, depart from the stated methodology, attributes and/or weightings in the evaluation of tenders.” This essentially gives license for councils to accept tenders only to change the tender conditions after the close date and then negotiate the contract directly with whomever they wish based on the new conditions – without going back to the original tender submitters.
-
3.1.1 which provides for council to require an “unconditional on-demand bank bond”. The biggest danger with such bonds is that, unlike a conditional bond, the principal does not have to establish an entitlement under the construction contract before it can make a call on the bond.
While it is unlikely that a local authority will call in such a bond without good reason, there are other implications for contractors. Given ARCG requires a bond letter to accompany the tender documents, you actually have to get the bank to write the letter before you even submit the tender.
It is important to understand that the ‘on demand’ bond is actually a separate and independent contract between your bank and your client, and you are giving the bank the right to write a cheque out of your account at the request of council – unconditional and on demand – with no questions, no reasons, and no notice period. Therefore this type of bond introduces a risk on the bank in that you may not have sufficient funds available at the time of the demand.
So, in order for the bank to protect it-self to fulfill its own contractual obligations to your client in the event of the bond being called, they will ‘make sure’ your business has the funds available to provide for that commitment.
The only way they can do this is by ring fencing that amount in your bank account and, as a flow on, it would be reflected on your balance sheet as a contingent liability. So imagine you tender for a one million dollar job with a 10 percent on demand bank bond, you have effectively lost the use of one hundred thousand dollars of your own cash reserves – from the moment the bank signs the letter, and before you have even submitted your tender!
Now consider having two or three tenders in play at any given time and you start to understand the danger of this type of contract requirement. You have a perfectly healthy business with good cash flow and you caused it to become technically insolvent simply because you happen to have several tenders and a couple of contracts in play. You may have half a million dollars cash in your bank account but unable to buy a pen on your account at the stationers to sign the next tender document, because you would be trading while insolvent!
Under the Auditor General’s procurement guidelines, a local authority would need to have very strong justification to invoke this tender requirement given the potentially destructive downside risk even when everything is going well.
The one comforting factor, that mitigates at least some of the potential damage from these clauses, is that it is occurring in the local government space. The first time either of the clauses is acted on, there is going to be very close scrutiny and serious consequences for the local authority in the event the actions are not completely justified and the processes not fully transparent.
So, short of being able to convince ARCG and/or Simpson Grierson to remove hostile clauses, the industry will do everything in its power to ensure the risk of invoking them is far greater than any potential or perceived benefit in doing so.
Contractor Vol.34 No.3 April 2010
All articles on this website are copyright to Contrafed Publishing Co. Ltd.
