Introduction

In response to meeting the needs of a changing landscape, aligning with current legislation, attempting to reduce the use of special conditions etc., Standards New Zealand has updated their standard conditions of contract for building and civil engineering construction and released NZS3910:2023.

The most significant change in the new NZS 3910:2023 is the Engineer to the Contract (EtC) role. This person previously acted as the agent and expert adviser to the Principal on the one hand and independent and impartial certifier/decision maker on the other. This role has now become two clearly defined separate roles, i.e. a Contract Administrator (CA), and an Independent Certifier (IC) respectively each separately engaged by the Principal. The CA and IC cannot delegate their role, but the Principal may engage Advisers to advise them.

However, the 2023 version allows one person to fill both roles. This is ostensibly for use on small or less complex projects to avoid possible duplication of roles to save on costs although the guidelines do not define the project types where this dual role might be appropriate.

Impartiality Concerns

One of the drivers of the change was to provide an opportunity for the roles to be separated due to EtC impartiality issues experienced in New Zealand.

This separation is likely to be taken further by some Principals, by appointing an IC employed in a separate firm to the CA, in the belief that this will resolve these concerns. But is this necessary or a wise move in the context of ensuring the smooth administration of the contract?

Location in separate firms has the potential to remove the IC from day to day interactions with the CA and turn the IC role into a certification and adjudication role, which is not helpful in ensuring the project runs smoothly which was a characteristic of the old EtC role.

Poor performance by either the CA or the IC could affect the others’ role to the detriment of the project and result in variation claims by the Contractor and/or issues with the Principal. CA/IC crossovers become more complicated if they are located in separate firms. For example, clause 10.4.5 requires warranties to be supplied to both the CA and IC. If a warranty is not executed properly (or a material is substituted and an incorrect warranty resulted), and later found to be unenforceable who is responsible the CA or the IC? The Principal could take action against the firm involved but this would be more complicated if the CA and IC were located in different firms. The relationship between the CA and IC will become critical. Back to back liability provisions may need to be considered.

This sort of interpretation of impartiality could mean the IC not being involved in anything to do with the project until the construction stage. An EtC was usually part of the initial project team, particularly in shaping the contract, and in procurement deliberations. This knowledge would be lost to the project.

As long as the Principal is paying the IC, the IC cannot be truly independent and impartiality concerns will persist regardless of where the IC is located.

Impartiality relies on the professionalism of the person chosen to perform the IC function, not the location of the IC. A significant development in the New Zealand construction industry in this area is the newly formed Society of Construction Contract Practitioners (SCCP) organisation whose members are governed by a code of ethics/conduct process. It is intended that future IC’s will be chosen from their ranks, certainly for government agency projects. This should have the effect of raising practitioners standards with members held accountable for their actions by their peers.

It should be noted that it is not a requirement of the contract that the CA is employed in a separate firm to the IC; in fact, the CA and the IC can be the same person.  It is also not a requirement for any practicing IC members of the SCCP organization to be located in a separate consultancy to the CA.

Be all of that as it may, what are the implications of the separation of the two roles?

The Current Situation — NZS 3910:2013 Version

In terms of the 2013 version, one person performs the role of EtC assisted by Engineer’s Representative (s) (ER) from “time to time” i.e. when indisposed for a period of time. The EtC is able to delegate all of their functions (some require written confirmation to the Contractor) with the exception of reviewing matters in dispute. This is the time honoured method.

However, due to impartiality concerns, the fact that some Principals do the delegating on behalf of the EtC (before the EtC is actually appointed) other scenarios have evolved in practise.

Firstly, we have seen EtC’ s delegable tasks all being delegated to an ER from the beginning of the contract (not from “time to time”) thus potentially relegating the EtC to an adjudication function.

Secondly, but to an ER based in a separate firm to the EtC, which also relegates the EtC to an adjudication function.

Thirdly, the EtC sometimes retains some tasks e.g. retaining the delegable tasks in 6.3.3 (b) and delegates the remainder to an ER. This method has been developed to ensure the EtC is still responsible for the smooth running of the project and is able to fulfil the function of being an expert adviser to the Principal.

The New Situation — NZS 3910:2023 Version

The third version described above is arguably the most commonly used in New Zealand and it seems to be where the new 2023 version is generally pitched, but with the IC replacing the EtC and the CA replacing the ER. There are, however, some significant differences and potential issues.

The CA Role

The CA issues Instructions to the Contractor and “acts on behalf of the Principal” and is not required to be impartial. The CA performs the “functions of the Contract Administrator as required by the Contract.”

The CA has been given an expanded role i.e. more tasks to carry out than the old ER and some of these are quite significant. Examples are agreeing variation entitlement (clause 9.2.4) and resolving discrepancies in contract documentation (clauses 2.2.4 and 2.8.3) which were, in our experience, usually resolved by the EtC.

The CA is encouraged to come to an agreement with the Contractor on most matters where possible. For example the CA can agree on entitlement + valuing of variations + granting of Extensions of Time (EOT’s) without involving the IC (clauses 9.2.3, 9.3.4 and 10.3.4).

The CA does not have to follow contractual procedure when granting an EOT. The CA may simply come to a commercial or expedient agreement.  This process may not be acceptable to government agencies where any significant agreements made which could be outside departmental delegation limits could be subject to audit.

However, if called upon to make a Decision with regard to an EOT claim the IC is required to follow the contract process outlined in clause 10.3.6.

It is also likely that practitioners currently carrying out the ER role will require considerable up skilling to perform the CA role and the cost of carrying out this role may in some cases be higher than the old ER role.

The IC Role

The IC makes Decisions (defined term) and “acts fairly, impartially and independently” on matters not agreed between the CA and the Contractor and certifies Payment Schedules (mandatory), deciding the Contractor’s entitlement to and valuing of variations (if not agreed by the CA), granting of EOT’s (if not agreed by the CA) and issuing Completion Certificates (mandatory).

The IC generally seems to have a reactive role i.e. not guiding the project and avoiding disputes although in terms of clause 6.10.2 (early warning) and 10.3.4 (extension of time) the IC can suggest the CA and Contractor meet to progress a particular issue.

The IC has to be copied into the following: Contractors Reports (clause 5.22.1), Instructions (clause 6.3.2), Early Warning Notices (clause 6.10.1), Valuation of Variations (clause 9.3.2), Final account (clause 9.11.1), EOT Notices (clause 10.3.2), Completion Records (clause 11.3.2) Mediation (clause 13.1.2) and Arbitration (clause13.3.2).

The above is important as the IC would need to be kept informed in order to make decisions in time to meet contract timeframes and comply with clause 6.3.1(perform functions without delay) and avoid the pitfalls of clause 6.3.3 (Contractor could claim a Variation due to a failure by the CA/IC to carry out their duties properly), to ensure the Contractor does not suffer delay. Although, to be kept fully informed, the IC should be copied in to all correspondence. A notable omission in this regard are notices from the Contractor claiming variation entitlement.

Options

As is the case with the current system, it is likely other scenarios will develop.

One scenario is where the Principal requires the IC to play a more proactive role in the project. This could entail the IC being copied into additional contract correspondence, such as variation entitlement correspondence, attending Project Control Group (PCG) meetings, attending and/or perusing site and special construction meetings (to ensure information is being properly captured, issues resolved etc), receiving and reviewing construction programmes and possibly even taking over some of the CA functions such as resolving variation entitlement. Current EtC’s are arguably amongst the most experienced practitioners in the industry. The paradox is that the old EtC was the expert adviser to the Principal and responsible for the smooth running of the project. This has now become the CA’s role, who is not required to be impartial, nor as experienced typically.

The sweet spot would need to be found between keeping the IC involved and fully up to date without the Principal having to pay two persons to carry out the role previously carried out by one person.

A second scenario is an IC “lighter touch” option. The IC is involved throughout the project due to having to certify Payment Schedules and issuing Completion Certificates. However, this could be a light touch as the preparatory work could be done by the CA and the Quantity Surveyor as an Adviser to the IC and therefore just signed off by the IC. The IC could largely be performing an adjudication function i.e. making Decisions on matters not agreed between the CA and Contractor but not assisting in the smooth running of the project.

This method may avoid double paying by reducing the IC’s involvement to a largely adjudication function.

Regardless of the two scenarios described above, Decisions are essentially resolving disputes.  The number of Decisions required, and the costs involved in making those decisions could be considerable if the project becomes adversarial.  The Principal pays the IC fees (which because of the unknown factor would likely be based on a time charge), unlike the NEC form of contract where an Adjudicator’s fees are shared 50/50 between the Principal and the Contractor.  The Contractor is not incentivised to not request Decisions.

Conclusion

As is the case with the 2013 version, it is highly likely that all the different scenarios described above will be adopted on different projects, which can be summarised as follows:

CA and IC roles to be undertaken by same person

• This is the time honoured traditional way. Settled case law on the EtC’s dual role dates back to the mid 1800’s in the UK.
• Traditionally EtC’s (or their equivalent) were members of professional bodies governed by a code of ethics. NZS 3910:2013 makes provision for the professional qualification of the EtC to be identified. NZS 3910:2023 does not make this provision but IC membership of the SCCP will fulfil the code of ethics function.
• Avoids any possible duplication of roles and consequent additional costs.

CA and IC roles as currently described

• IC role is essentially certifying and adjudicating. The adjudicating (making decisions) aspect of the role could become an expensive exercise if the project becomes adversarial. Under the old EtC/ER arrangement the EtC fee would usually be a fixed price (excluding formal decisions) with both the impartial EtC and ER working together to make decisions. Under the new arrangement making a Decision would most likely have to be charged on an hourly rate basis, particularly if the IC is located in a separate firm.
• IC is not across all project correspondence therefore it could be challenging for the CA/IC to comply with clause 6.3.1 (perform functions without delay) and avoid the pitfalls of clause 6.3.3 (Contractor could claim a Variation due to a failure by the CA/IC to carry out their duties properly), given, for example, that the CA may spend some time considering an EOT claim which is not agreed and then the IC has to repeat the exercise.
• The IC may wish to engage their own advisers. This will require a special condition.
• CA’s may require up-skilling.
• Given the complexity of modern contracts the CA should be able to delegate parts of their role without prejudice to compliance by the CA with the requirements in the contract i.e. the delegee has no authority under the contract but the CA does not have to do everything personally as suggested in the contract. This will require a special condition.
• Contractors could be unhappy with the impartial IC not being copied into variation entitlement correspondence (will require a special condition).
• Government agency Principal’s may be unhappy with the CA agreeing Extension of Time (EOT) claims without taking the factors an IC is obliged to take into account (delegated authority issue). This will require a special condition.

Expanded IC role

• There will inevitably be an overlap of tasks within the CA/IC roles, but the additional costs may be offset by the IC playing a collaborative and proactive role and avoiding protracted disputes.
• Consider a special condition to allow the CA to consult with the IC in making agreements.
• IC will need to be copied into more (all) correspondence which will require special conditions.

IC located in a separate consultancy to the CA (applies to both options above)

• The IC is paid by the Principal therefore cannot be truly independent, and being located in a separate consultancy does not resolve this issue. This is simply a matter of perception and is more dependent on the professionalism of the person who undertakes the IC role.
• Potential liability issues. Back to back CA and IC liability provisions may need to be considered.
• Inevitable duplication of roles due to the remoteness of the IC resulting in additional cost.
• The contract does not require the CA and IC to be different entities; they can legally be the same person.
• This is also not a requirement of the Society of Construction Contract Practitioners (SCCP).

Ultimately, while the new system aims to address impartiality and clarify roles, it may also introduce additional costs and complexities. The Principal’s decision on how to implement these roles could significantly impact contract administration and cost effectiveness.

Postscript

We have been involved in a large project initially set up on the 2013 version that was changed to the 2023 version following the appointment of the Contractor but prior to the commencement of construction.  We learned the following:

• A substantial number of special conditions, both unique and “standard” were carried over from the 2013 to the 2023 version. It was observed that many recurring project issues previously addressed by “standard” special conditions in the 2013 version were not covered in the new version.
• The EtC fees were fixed (apart from making formal decisions) on the 2013 version. The Principal chose to engage an IC located in a different consultancy to the CA. The IC fees on the 2023 version have a potentially significant unknown hourly rate component. The IC fee budget is considerably higher than the original EtC fee proposal based on an EtC/ER located in the same firm.
• A special condition was introduced requiring the CA to consider the same factors as the IC when assessing Extension of Time (EOT) claims.
• The Contractor raised concerns about the CA not being required to make decisions fairly, impartially, and independently, particularly regarding variation entitlement which are crucial decisions under the contract.
• It was necessary to amend certain clauses to align the process for variations with that of the EOT’s, increasing the involvement of the IC by ensuring the IC is copied into all correspondence and addressing the lack of consequences in the 2023 version if the CA fails to meet the specified 20 working day timeframe for decisions, an accountability feature present in the 2013 version.