Exploring feasible solutions to payment problems in the construction industry in New Zealand
As in any commercial activity, cash flow is vital for the survival of construction businesses. Construction activities take a long time, the products are expensive and the fact that payments are usually made for work already done, makes cash flow and financial status highly dependent on timely payments from the principals. Cash flow constraints of contractors not only result in business failures but also create flow-on effects in the supply chain. In recognition of these effects, most countries including New Zealand have established payment-specific construction industry legislation to ensure a steady flow of cash to project participants. However, payment problems persist within culture and practices, suggesting that industry characteristics may make it difficult to mitigate the problems. It is in this context, that this research investigates payment problems in the New Zealand construction industry with the main focus on exploring feasible solutions to secure payments to construction parties.
This research has adopted a sequential mixed-method design consisting of three approaches; preliminary document analyses of liquidators’ reports, and payment disputes heard in the High Court; analysis of a questionnaire survey; and interviews with construction industry practitioners. The data collected through preliminary investigations and an online questionnaire administered to consultants, contractors and subcontractors based in New Zealand was validated and extended using semi-structured interviews with subject matter experts (SMEs). Data analysis techniques employed include: descriptive, inferential statistics and thematic analysis.
The findings of the study confirm that payment problems are still prevalent though not as widespread and significant as was the situation before the introduction of the Construction Contracts Act (CCA). The prevalence of payment problems is mainly due to failure to comply with the requirements of the CCA, lack of knowledge and understanding of the Act, and financial strength of industry players. The study found that other main causes were cash flow difficulties due to delays and non-payments experienced on other projects, disputes over payment claims and responses, inadequate fund sourcing and management, the easy exit of players from the industry with little/no liability to creditors, and the general payment culture of the industry. The research revealed that the cost consequences of construction insolvencies are significant and very often there is no security for payment losses due to insolvencies. The research finds that the most appropriate forms of securities include: escrow/trust accounts, principal payment bonds, direct payments/tripartite agreements and retention bonds. Amongst, the use of escrow accounts seems the most appropriate/feasible protection mechanism for held funds (e.g. retention monies). Subcontractors and lower tier parties in the construction supply chain are more impacted by payment difficulties and very often are unable to secure payment from the upper tiers. The cost of a financial security and constructors not being able to influence the upper tiers are found to be two major practical obstacles for obtaining security for payment in New Zealand. The research therefore recommends among others, adjustments to provisions within the CCA and other regulatory documents, changes to registration and pre-qualification of project owners and participants, changes to project administration processes, and general attitudinal changes within the New Zealand construction industry.