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New Zealand Building Industry Federation

Response to the:

MBIE – Residential Construction Sector Market

Study: Options Paper

17 December, 2013

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Introduction

The New Zealand Building Industry Federation (BIF) represents some 120 leading members of the

building industry supply chain embracing manufacturers, importers and marketers of products for sale

on the New Zealand market.

BIF exists to promote stable and sustainable growth in the building and construction industry;

encourage effective skills training and accreditation regimes for, and within, the industry; and promote

best practice standards throughout the sector. It is supportive of free market policies in the market

place and operates in an open commercial environment featuring intense competition between locally

manufactured and imported products.

The purpose of this paper is to present to MBIE views of BIF members on the Residential Construction

Sector Market Study: Options Paper. The approach taken by BIF has been to encourage members to

make individual submissions on the paper, provide no general guidance on positions that might be taken

by those members and reflect in this document the views of members as expressed to BIF. Many of our

members are in competitive market situations with other members and views may differ. Our intention

is to present these views for consideration as openly as possible.

We also wish to emphasise that the building and construction supply chain is under intense price

pressure, from home buyer to builder. This includes price pressure from builder to merchant and price

pressure on manufacturers. Many industry participants have for the past four years struggled to make a

return on investment in their businesses because of the downturn which accompanied the global

financial crisis.

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Issue: Complexity and Inaccessibility of Acceptable Solutions

1. Which of the four options (or combination of options) described above will be most effective at

improving access to Alternative Solutions for demonstrating code compliance? Why?

BIF supports all of the options proposed, but considers the most significant to be Option 2: Greater

specificity of what is needed for lower level product assurance.

Several factors are recognised as contributing to below-optimal performance in the residential sector

around product assurance. These include:

a lack of NZ based certification bodies;

insufficient transparency of the certification providers; and

a lack of clarity around the “rules” for lower risk product assurance.

There are two roles in this area. One is that undertaken by BRANZ, which embraces the provision of

testing, consulting, evaluation and appraisal. The other is that of Product Certification bodies accredited

by JASANZ and endorsed by MBIE, which certify products to CodeMark standard based on information

provided from the applicant.

BIF believes that support would be forthcoming for measures which:

Increase sector knowledge of product assurance processes through educational initiatives;

facilitate greater access to and awareness of certification providers, by promoting among other

things a stronger NZ domestic certification presence;

provide more clarity around how lower risk products can be more easily and cost effectively

evaluated; and

lead to increased adoption of alternative solutions, particularly by BCAs.

Currently a view exists that the predominant reliance on three offshore providers for domestic

certification is not conducive to greater uptake of the certification path, which is the option most easily

accepted in the current process by BCAs. Consistency across all BCAs of the adopted process is also

essential (as to which, see the submissions below in relation to centralised consenting). The success of a

product assurance framework will be fundamentally dictated by whether BCAs as a whole accept it (or

are required to accept it).

A number of our members are emphatic that the process for obtaining clear information from product

manufacturers in a consistent form must provide a clear distinction for products used in inherently

higher risk situations, such as those contributing to the structural and weather tightness performance of

the building. Failures of these products at a later stage will be more significant e.g. leaky housing

situation (weather tightness) or structural failure (engineered products).

It is also important that a laudable desire to encourage competition and innovation does not lead to a

reduction in performance standards of building products. Product assurance requirements may well act

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as a barrier to entry in some cases, but this is a logical and necessary defence against unproven and

possibly unsuitable imported products and systems penetrating the NZ market.

However, a product assurance scheme does not have to be complex, as evidenced by MBIE’s own work

on the Product Assurance Framework which matches the complexity of product assurance with the risk

of failure in use of a product. Thus, a doorknob is low risk, so manufacturers’ technical information will

suffice for approval. Exterior claddings are high risk, so an independent appraisal or CodeMark

certification is necessary. There is some feeling that the “risk pyramid” has yet to be widely understood

and adopted by industry and BCAs. This would be a useful focus for further industry education.

BIF is unaware of industry capture of the BRANZ Appraisal process. A number of members report that

performance assessment procedures for their products or systems followed by BRANZ have been robust

and challenging. The industry must have a neutral and credible test and appraisals body, not least

because of the growing number of little-known new products from overseas that are entering the

market. A BRANZ Appraisal is not mandatory for new products entering the market but both overseas

and local suppliers of materials and products regularly choose to obtain one for marketing and

consenting reasons.

BRANZ, MBIE and industry (including the Construction Industry Council and the Construction Strategy

Group) have produced the Industry Research Strategy (IRS) which is used to shape the BRANZ research

programme. New projects proposed for the programme are evaluated annually against the IRS by an

independent industry-derived Advisory Committee.

In summary, the sector would benefit from a more specific approach as to what is required in order to

satisfy BCAs and from a more transparent risk-based approach from BCAs toward the adoption of

alternative solutions, supported by enhancements to BRANZ’s role as an appraiser and tester of building

products.

2. What unintended consequence for the construction sector or the economy as a whole might each

of the four options entail?

We see no unintended consequences arising from the four options presented, subject to the comments

above.

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Issue: Specification by brand

3. Which of the two options described above will best promote competition in building products?

Why?

BIF does not favour either option.

This issue, and the options proposed in response to it, are based on the assumption that a wide range of

building products are directly substitutable for one another. This is not necessarily the case, other than

for a fairly limited range of simple and commoditised products. And even in those cases, the

specification of a product by brand is not based solely on the quality and performance of the product. It

may also take into account after-sales service, client demands and the reputation and substance of the

manufacturer/supplier. Global rules prohibiting “no substitutes” specification or requiring specification

by performance only do not acknowledge these realities.

In particular, consideration must be given in the product specification/selection process to the support

and backup by the product/system supplier, with preference to proven products/ systems from well-

established suppliers. There are numerous examples of product failure closely followed by company

failure e.g. the Nautilus Tower, Orewa, where a particular cladding product was specified but a cheaper

alternative was used and the importer and distributor then went into liquidation. Also French-supplied

corrugated roof sheathing was used in a number of houses around New Zealand, and a similar situation

to that at Orewa arose, with defects discovered and subsequent liquidation of the supplier.

Where specification by performance is appropriate and realistically possible, it tends to happen already.

For example, the steel business is heavily commodity (unbranded) product oriented and while there is

support for marketing and branding as a fundamental part of good business practice, lack of brand

specification in the steel sector is not viewed as impeding efficiency. There is some agreement that a

“no substitutes” clause would be unnecessarily restrictive, but the opinion is widespread that moving to

a “no brand” performance-based regime will not bring significant change to the steel supply sector. It is

widely considered that a change of this kind would need to be preceded by significant overhaul of the

current product assurance and testing regimes. However, structural products introduced into NZ

manufactured from steel of unknown origin can pose considerable risk to product compliance with the

Building Code. This highlights that even heavily commoditised products are not necessarily directly

substitutable in all cases. Substitution must still be managed carefully to ensure that a true “like-for-

like” is obtained.

More broadly, BIF believes that the well-established process/procedure of the qualified LBP designer

designing/specifying products on a performance basis to meet Building Act/Code Compliance should

remain in place. Specifying by brand can ensure controlled quality installation. Many manufacturers’

brands also require “approved sub-contractors” to install them. Substitution may also affect the

availability of product warranties. LBP designers understand and include these considerations in their

choice between brand and generic specification.

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Independent building product analysts have a strong view that allowance of specification by brand is

necessary so that the required physical or chemical properties of a building are achieved, for example,

using plasterboard interior linings to provide bracing resistance against wind and earthquake.

Substitution of one brand for another, possible under generic specifications, will not give assurance of

equal performance.

Any proposal for less-controlled substitution also risks confusing the legal responsibilities for making the

decision to substitute. A designer taking responsibility for the building he or she has designed should be

free to specify those products the designer believes should be used. By suggesting that a person other

than the LBP designer, for example the builder, can make substitution decisions based on performance

undermines the clarity of responsibility for design and specification. Where does the responsibility (and

liability) then sit? At worst, any substitution needs to be clearly documented and signed off by the party

willing to take responsibility for that decision.

Hence, the preferred option is to leave it to the designer to specify by “brand’ or generically, according

to their view of what is appropriate in the circumstances. If substitution is a possibility at a later point in

construction, it is appropriate that this should require the parties to revert to the designer for approval

(and potentially also to the BCA).

4. Which of the two options described above will carry the least compliance costs for industry

participants? Why?

The status quo is preferable. This leaves it to the designer to make specific or generic product choices as

appropriate, and as currently occurs. The LBP designer is making product performance/ specification

decisions all day long, and understands the consent/code compliance regime better than anyone else in

the process.

5. What unintended consequence for the construction sector or the economy as a whole might result

from each of the two options?

If a restriction on “no substitutes” clauses is to be introduced, it should be limited to critical elements

only, such as structural and weather tightness, and only if responsibility for the decision is clearly

allocated and documented.

Stating performance criteria only (no brand specification allowed) assumes that the builder is

competent to make decisions on product selection and performance, often requiring technical and

engineering experience which he (or she) may not have. This leaves the consumer exposed as

warranties will be void with wrong product selection. It may also create additional uncertainty in the

consenting process, if BCAs ultimately disagree with the product choices made.

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Issue: risk aversion

6. Will the recognition of manufacturer warranties in liability and consenting (as described above)

mitigate against BCAs being overly conservative? Why?

Manufacturer warranties exist already with reputable companies, and are taken into account in

specification decisions by designers. A significant majority align with builders’ liability under the

Building Code. The conservative behaviour at BCA level is a natural response to leaky homes, the

liability they hold as a result of the consent and compliance process, and the position of insurance

companies in regard to this liability. The ability of companies to easily liquidate and disappear will

remain, leaving the consumer without comeback, regardless of warranties given. So BCAs will continue

to be conservative, particularly in the higher risk areas of structural and weather tightness.

There can be little doubt, however, that risk aversion is having an impact on the willingness of industry

to introduce new technologies, products and systems and there is, therefore, much support for the

continuing work of the Law Commission to make adjustments to the laws governing liability. It would be

unrealistic to expect manufacturers alone to cover the full consequential costs of replacing the product

and, if such a requirement were imposed, it is likely that prices would rise. This will be exacerbated if

legal changes mean that other responsible parties are exempted from liability if a manufacturer’s

warranty applies.

BIF is also concerned at the apparent view in the options paper that the risk to manufacturers of product

failure is quantifiable. This is not the case. If manufacturers are to be liable for the full cost of

reinstating defective buildings, then their liability in this regard varies significantly from building to

building and over time. It is not realistically quantifiable.

Against this background, the recommendation that BCAs and others be encouraged to utilise

manufacturers’ warranties and so open up the sector to new products and technologies has some

support in principle. But there is concern that, if there are no changes around liability, manufacturers

will perceive their risk exposure as greatly increased and factor in price premiums accordingly. Material

supply is only one part of the construction process – the role of installers and other sector participants

needs to be considered in this context. Under the joint and several liability position it is not uncommon

for a manufacturer to be left, usually with the ratepayer, to fund remedial work caused by poor design

and various sub-trade workmanship issues because of existing insolvency law and the absence of

compulsory workmanship insurance for all on site.

A further significant issue in respect of recognition of manufacturers’ warranties in liability and

consenting is posed by the question: how do you deal with importers of products made in China who set

up a new company every year and close the old one?

7. What unintended consequences might result for the construction sector or the economy as a

whole from this option?

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A significant increase in manufacturer liability as a result of mandatory warranty terms could lead to a

rise in building product prices as manufacturers and suppliers factor in actual or perceived increased

liability.

It must also be remembered that a warranty is only as good as the substance of the

manufacturer/supplier giving it. If the manufacturer is not based in New Zealand or chooses to exit the

NZ market, the sector including builders, designers and consumers, could be left with a major issue.

Further, an acceptance of substituted products as suggested under the previous issue is seen as of

concern if warranties are given greater significance. Where warranties are important, specification by

brand is inevitable. Otherwise, system warranties could be void in many cases and BCAs could be held

liable, leaving the consumer completely without recourse.

Blind acceptance of substituted products without an appropriate level of verification which might fail

and create further huge costs on consumers is of concern. System warranties could be void in many

cases if a product comprising part of the system is substituted.

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Issue: Acceptable Solutions

8. Could greater government funding in relation to Acceptable Solutions promote competition from

innovative systems? Please provide details.

It could shift current industry self-funding away from finding alternative solutions, into de-facto private

R&D, paid out of the public purse.

Inefficient and inconsistent consenting behaviour can be addressed through the proposal for National

Online Consenting rather than by expanding the scope of Acceptable Solutions. This would in turn give

larger builders the confidence to develop and promote trans-regional building systems and solutions.

Much needed economies of scale should also be an outcome of this initiative, along with a reduction in

direct costs of compliance and time delays.

Limited availability of Acceptable Solutions often occurs because it is not possible to find “a cook book

solution” for every building issue or assembly. More use of Alternative Solutions would help but this

prospect is clouded by the liability position of BCAs.

It is also valid that lengthy product assessment processes can occur because there are often not quick

and simple tests for products put forward for assessment. For example, accelerated weathering of

paints or plastics takes a minimum of six months, and a 12 month test is more reliable. All building

products that have an NZBC performance requirement also need an assessment of durability.

9. Would this represent an efficient use of public money? Please provide reasons.

No. A better option is to government fund a central scientific research organisation, like CSIRO in

Australia, as a Building Science Group, charged with advancing building science generally and supporting

the industry in finding economic, alternative building solutions – an extension of BRANZ would achieve

this. Some of these alternative solutions may in time become Acceptable Solutions, but direct

development of new products or systems as Acceptable Solutions is not an appropriate use of public

funds.

10. To what extent should Acceptable Solutions be used as a path to greater innovation, vis-à-vis

Alternative Solutions?

The option is clearly available now for products/systems to be developed to comply as an Acceptable

Solution. Additionally, the focus must be on streamlining product assurance processes to give BCAs

more confidence in decisions around Code compliance. Members note the reference to “National Multi-

use Approvals” - Multiproof - and many would support greater application of this in residential

construction, particularly as it may drive consolidation of a fragmented industry.

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Issue: Inefficiencies in the Consenting Process

11. To what extent will greater use of risk-based consenting enable efficiency gains to be made within

the residential construction sector? Please provide reasoning.

For low risk buildings

Construction timelines will be reduced with subsequent time savings.

Consent costs will be reduced accordingly.

A NZ-wide consistent clearly-defined centralised consent application and processing system for all BCAs

will reduce the consent cost.

There is support among our members for the adoption of risk based consenting outlined in the Building

Amendment Act of 2012. A risk based approach may balance efficiency against complexity and perhaps

free up BCA resources to focus on more complex buildings.

12. What negative effects might arise as a result of any increased use of risk-based consenting?

Any risk-based consenting and building control process is dependent to a greater or lesser extent on the

quality assurance processes of those involved in construction. Given the proliferation of failures and

liquidations in the NZ finance and building industry sector (Star Plus Homes), the tendency may be to

reduce cost wherever possible.

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Issue: Reducing information asymmetries

13 - 16. Which of the options to improve the transparency of strategic conduct, such as rebates, will

be most effective? Why?

This is a difficult area for BIF to address. It goes directly to the pricing behaviour of its members, many

of whom are in competition with each other. BIF therefore expresses no opinion on this question, and

has advised its members to make their own, independent submissions on this topic.

Beyond this, BIF’s only comment is that it supports the observation at several points of the options

paper that many of the rebates, incentives and other strategic behaviours discussed are potentially

features of strong competitive behaviour, and are not necessarily anti-competitive in intention or effect.

As the options paper recognises, this should be taken into account in any policy response, such that a

response does not inhibit proper competition.

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Issue: promoting best practice

17. How effective do you think government procurement could be in promotion best practice in

construction contracts and tendering? How could the work around best practice procurement best be

disseminated to the sector?

Government procurement has often in the past gravitated to the lowest price offered, with disastrous

results. The surge in leaky school buildings is often cited in the industry as an example of how lowest-

price based tendering can be counter-productive. An emphasis on whole of life quality criteria in

government procurement would assist considerably in lifting building standards. While the projected

all-of-government purchasing dollar value for construction related materials going forward is on the

surface quite large, delivery quantities on an individual project basis will be significantly fragmented and

incur differential costs to service.

We suggest that the question for government is: what is the best point of negotiation? Is it the

manufacturer, the major building contractor or the merchant? Our view is that the major building

contractor is the most likely and the merchant the most unlikely. A challenge is to ensure that the

benefits of volume purchase are not offset by disruptions to the normal distribution chain, such as have

been experienced in the Christchurch rebuild in respect of the “HUBS” concept.

It is our view that special care needs to be taken to ensure that arrangements are not put in place that

distort the market, for example by addressing the “boom” demand period but causing an oversupply

after the boom. Prevalence of “boom or bust” cycles in the industry in recent decades has been

identified as probably the major factor in reducing industry skills availability at professional, technical

and workplace levels in boom periods such as New Zealand is entering with attendant performance

difficulties. BIF members would regard the use of government procurement to selectively induce new

players into the market for “the boom” as potentially likely to create over-capacity in the “bust” or more

normal demand period.

Promoting best practice can best be achieved, we believe, through partnering. Pulling procurement out

as a standalone skill set can be damaging to this process in that it promotes a one dimensional solution

when the construction process is multi-dimensional. Procurement needs to be seen as a subset of the

entire process; careful note taken of where it fits in the construction process and how other

construction factors may be affected by changes to procurement processes; and potential benefits and

losses appraised accordingly.

If Government intends to procure large quantities of products from overseas (P 41) they must be sure

that any such products comply with the Building Code and will perform satisfactorily under New Zealand

conditions. There are numerous examples of products with an excellent long term performance record

in Europe, for example, which have failed under NZ conditions.

The question is asked how effective government procurement could be in promoting best practice in

construction contracts and tendering. The Government has significant resources to run very structured

and lengthy procurement processes. It should consider developing and sharing its procurement

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documentation and practices with the private sector free of charge. There should be a set of free

standard procurement documentation available to the private sector to improve processes and

consistency.

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Issue: Anti-dumping duties and tariffs

18 - 21. Do you agree with the assessment that import tariffs are likely to have a minimal impact on

construction costs, especially given that most materials are phasing to duty-free through Free Trade

Agreements? Or would provision for applicable tariff duties be suspended for the time being under

the system of tariff concessions help lower costs in specific instances?

The anti-dumping process has been developed over many years of international free trade negotiation.

Assessment by government of anti-dumping claims by industry is stringent. Protective measures are

taken only after intensive review of the impact of relevant imports on local industry. The incidence of

successful anti-dumping applications is low. Many of our members would not see any material benefit

accruing either nationally, regionally or within any industrial sector by reducing the level of anti-

dumping protection. On the contrary, liberalising the anti-dumping regime to support the construction

sector may well have negative and difficult to forecast implications (such as price increases) for other

sectors of the economy.

BIF members generally do not believe that import tariffs represent a factor in increasing costs or

promoting inefficiency in the residential sector. They are at historically low levels and programmed to

decrease further as part of international commitments. Conversely, NZ manufacturers are required to

maintain export pricing structures so that they comply with all anti-dumping regulations.

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Issue: Innovation

22. What, in your opinion, should be the government’s role in promoting innovation in the residential

construction sector?

There is support for the use of building levies for a Building Science Group along the lines of a BRANZ or

CSIRO model, providing a scientific independent approach to innovation within the building industry. In

this context the work of the Productivity Partnership between the public sector and industry on

innovation is regarded highly by sector participants.

Overall, there is support for the opinion that the fragmented structure of the residential construction

sector gives rise to below optimal productivity/high costs and does not support active promotion of

innovative new products or building systems. Resources should therefore, in our view, be channelled to

those mechanisms which will encourage industry co-operation to foster innovation and productivity,

such as the Productivity Partnership and BRANZ. Such co-operation will bring economies of scale,

greater standardisation and enhance supply chain practices, management and trade skills. BIF is

supportive of existing work streams focused on productivity and skill development (to underpin the use

of technical solutions like BIM) and the accompanying suite of proposed options: Productivity

Partnership, educational programmes, social housing and LBP skill development requirements.

According to Lincoln University research demonstration projects are a good catalyst for builder

innovation (and probably for their customers as well). A question arises in respect of the “Innovation

Network” option in that it seems much like product appraisals wearing another hat, without the rigour

of the existing processes, checks and balances that underpin appraisals. Where would liability lie in this

assistance to innovation? It may be useful for MBIE researchers to review the Lincoln University

publication on how builders innovate – largely by demonstration.

There is a view that the Government needs to weigh up its role as innovator against its responsibilities

with taxpayers’ funds. A number of members believe the Government should focus on being a facilitator

of targeted industry education and should look at using some government building projects to

demonstrate innovation. Social Housing proof of concept and a targeted education programme are

strongly favoured. Meetings or forums between builders and manufacturers hosted by the Government

are also favoured.

23. Which of the above options would be most helpful in terms of showcasing what can be done and

helping the sector to adopt new technologies? Why?

BIF favours option 3: criteria to promote innovation through BRANZ use of Building Research Levy.

But while criteria or objectives may be set for promotion of innovation through such agencies, there can

be no guarantee industry will take them up. The bottom line for industry is the commercial soundness of

the proposed innovation and this will always be the ultimate determinant of acceptance. BRANZ’s past

experiences can confirm this.

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A requirement in respect of the use of social housing as “proof of concept” for both builders and house

buyers is that standard details, prefabrication and affordability are demonstrated without sacrificing

quality or liveability.

24. To what extent is there a risk of adverse consequences if any of the above options are

implemented? Please provide reasoning.

There are several potential adverse consequences which need to be guarded against particularly in

relation to Option 2: how does one decide what innovation to pursue, and where will the drive to share

technology and resources come from amongst competing companies?

Research both by Ian Page at BRANZ and Professor John Tookey at AUT has shown that there are many

opportunities to reduce the cost of “the house”, without the need to develop yet more methods of

construction. Both Tookey and John Fairweather at Lincoln University have found that the industry is

generally risk averse and builders appear to be happy with the status quo. However, it may be asked

whether customers know enough to demand change.

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Issue: Construction Management

25. Which of the above options will best promote more efficient construction management practices?

Why?

Good construction management practices demand good construction managers. As the Option Paper

notes, few are graduating. This will continue to be the case until the construction industry is seen to

offer a good career path, good rewards and freedom from frequently “intense” boom-bust cycles.

Government procurement of housing and non-residential buildings can help through the publishing of

forward work programmes (ie The Pipeline) which ramp up when the industry enters a down cycle.

26. Which of the above options will carry the least compliance costs for the sector? Please provide

reasoning.

BIF supports Option 2: Licensed Builder Practitioner Requirements, because it is in place now, is

working, is clearly understood, accepted, and can be built on. The builder now clearly understands the

extent of his responsibilities and makes decisions in the best interests of his client. The prime issue is not

compliance cost but what makes for best value for NZ Inc.!

27. To what extent is there a risk of adverse consequences if any of the above options are

implemented? Please provide reasoning.

As confirmed in various Government publications, many businesses in the construction sector involve

self-employed operations. Many of these businesses sub-contract to larger builders, or are sole traders.

This gives rise to what many would consider a glaring gap in relation to ultimate protection, and

confidence, for consumers. The ease of liquidation for small corporates, and easily ring-fenced

protection of income and assets for individuals through trusts and other similar mechanisms, continues

to render the risk of financial and emotional cost of required remedial work extremely high for home

owners, despite the LBP scheme.

A form of compulsory workmanship insurance cover to fund defects claims should be introduced for

designers, critical sub-trades and all who work on a residence. The LDP regime should include this, along

with Approved Insurance Providers (AIPs). Compulsory insurance is “the norm” in Australian states.

Bruce Kohn

Bruce Kohn Chief Executive

Building Industry Federation

10 Treasure Grove, Hataitai

Wellington 6021 Tel: (04) 386-2793; email: bruce.kohn@xtra.co.nz