Equitable Margin Recovery (Within a WDR)
- The NZ Building Economist
- 1 day ago
- 6 min read
Equitable Margin Recovery Under NZS 3910:
Rethinking Working Day Rates, Proportionality, and Contractual Equity
In New Zealand construction contracts, few topics generate as much quiet frustration, and occasional dispute, as the valuation of time‑related cost under NZS 3910. The phrase most often used, “overhead and profit recovery”, is itself misleading. NZS 3910 does not define profit, and it does not provide a discrete mechanism for recovering it in the way practitioners often assume.
What contractors actually price is not “overhead and profit”, but a tendered margin, a hoped‑for financial outcome, exposed to the uncertainty of cost, overhead, and time risk. That distinction matters. It explains much of the tension that arises when projects depart from their planned programme and parties default to the Working Day Rate (WDR) as a blunt valuation tool.
"This article explores that tension, how NZS 3910 is structured to manage it, and whether alternative approaches better reconcile simplicity with equity."
There Is No “Overhead and Profit” — Only Tendered Margin
At company level, profit exists only on the ledger, assessed across arbitrary time periods and across all projects. Project ledgers rarely carry company overheads directly; instead, projects contribute positively or negatively to the company’s overall position.
AT THE START, what contractors tender is therefore not “profit”, but margin, a projection that assumes:
certain build costs,
assumed overhead recovery, and
time‑based risk that may or may not eventuate.
A low‑margin tender does not eliminate risk; it amplifies it. Understanding margin as conditional and time‑sensitive is critical to understanding how NZS 3910 intends time‑related valuation to function.
Proportionality: The Organising Principle of NZS 3910
NZS 3910:2013 is structured around proportionality and internal consistency. That principle appears repeatedly in the valuation of variations and in the treatment of time‑related cost.
The contract deliberately seeks to preserve the relationship between:
tendered rates and allowances, and
contract‑time valuations arising from variations and extensions of time.
The Working Day Rate is the mechanism chosen to achieve that aim. It is not designed to perfectly track monthly cashflow or actual turnover. Instead, it is designed to preserve the tendered bargain in aggregate, assuming the project broadly runs to time.
If, across the life of the project, the WDR recovers the tendered margin in total, no more, no less, NZS 3910 considers proportionality to have been maintained.
How the Static Working Day Rate Works
The NZS 3910 WDR derives a single nominated or reasonable rate per working day, used as a default valuation mechanism for time‑based compensation.
Its logic is simple:
take the tendered preliminary & general costs, and margin,
spread them across the programmed duration,
and derive an average daily value.
"This averaging is intentional, not accidental."
The WDR works best when project turnover reasonably approximates the planned average. If it does not, the WDR can feel either “too hot” or “too cold” at different stages of the works, but across the full programme, those effects are intended to cancel out.
Average Turnover and Shared Risk
Project turnover is not linear. Early works typically under‑perform the average; mid‑project turnover often exceeds it; late works frequently fall below again. Average turnover occurs only briefly, generally twice, once on the way up, and once on the way down.
Because the WDR is an average mechanism, it will appear unfair most of the time when viewed in isolation. This does not mean it is contractually inequitable.
NZS 3910 intentionally places the risk of variation timing within that averaging mechanism. In effect, the WDR treats turnover timing risk as shared risk, traded for the benefit of simplicity and administrative certainty.
This mirrors other contractual compromises, liquidated damages, for example, where parties accept an agreed simplification to avoid continual recalculation of actual loss.
Where the Tension Emerges: Margin vs Time
The real tension lies in the behaviour of different WDR value components.
Preliminaries and general costs tend to follow time, and therefore average reasonably well in a WDR.
Margin, however, follows turnover, not time, and does not average well in a WDR.
Embedding turnover‑driven margin into a time‑based mechanism creates friction:
"Time and turnover are being forced into an average time capsule."
When turnover becomes highly irregular—as seen on many projects during COVID disruptions, the WDR can produce outcomes that appear disproportionate both before and after the disruption.
The critical question then becomes:Is that disproportionality merely uncomfortable, or contractually inequitable?
COVID as a Public WDR Stress Test
COVID lockdowns provided an unplanned "publicly open" stress test of NZS 3910’s valuation logic. Static WDRs for isolated project delays, could be managed in isolation. But when every project everywhere, all suffered the exact same factual set of circumstances, both high and low turnover project phases highlighted to everyone, that something was more often under or over recovered, and usually not recovered compared to real world turnover.
You were left feeling uncomfortable, with a mechanism that usually provides the wrong answer?
This led many to ask:
If the WDR feels disproportionate both before and after a major disruption, what is the “right thing” to do?
Should clause 9.3.13 (contractual inequity) be invoked to correct the outcome?
The contract’s intent is important here. Contractually inequitable provisions exist to address unintended and materially unfair outcomes, not to revisit every instance where an agreed mechanism produces discomfort.
A Turnover‑Proportional Alternative
One proposed solution is a turnover‑proportional Working Day Rate, separating time‑driven preliminaries from turnover‑driven margin.
Under this approach:
Preliminaries and general costs continue to follow time using a classic WDR.
Margin is converted into a daily value based on planned monthly turnover.
For example:
For every unit of $100,000 of planned turnover per month, times 1% margin = $1,000 margin, divide an average 20 working days per month gives us a universal Margin WDR formula of:
$50 WD, per 1% margin, per $100,000 planned turnover per month.
If $100,000 of planned monthly turnover equates to $50 per working day per 1% margin,
then a 6% margin equates to $300 per working day per $100,000 of planned turnover.
For a delay occurring where the specific months planned turnover is $850,000, that is 8.5 ($100k units) x $300 = $2,550 per working day for the margin component of full WDR, to be added to the P&G component, for the purposes of a time related cost calculation, for a delay during that specific month.
This preserves tender proportionality more precisely at any point in time, rather than in aggregate only.
However, such a method is not provided for in NZS 3910 by default. It would require a Special Condition, negotiated consciously by both parties.
Simplicity vs Equity: The Real Choice
The debate is not whether turnover‑proportional methods are mathematically fairer, they often are. The real question is whether parties wish to trade:
simplicity and certainty, for
precision and responsiveness.
NZS 3910 overwhelmingly favours simplicity, on the assumption that the averaging effect will balance out across the project lifecycle.
Invoking contractual inequity to override a WDR risks undermines that bargain. If the WDR is understood and agreed as a shared‑risk average, much like liquidated damages, it should not be casually displaced simply because circumstances make the average visible.
When Does Contractual Inequity Step In?
Clause 9.3.13 is not a routine recalibration tool. It is a circuit‑breaker for outcomes that:
were not contemplated by the parties, and
are materially unfair when the contract is applied strictly.
If the industry believes that average‑turnover‑based margin treatment is fundamentally unsatisfactory, the cleaner solution is not post‑hoc adjustment, but better drafting up‑front.
Fix the tension, rather than litigating around it.
Where This Leaves Us...
Four conclusions emerge:
The way it appears
Time‑related margin recovery preserves the tendered bargain in aggregate.
Static WDRs are blunt but intentional.
The way it is
NZS 3910 embeds shared risk through averaging.
Discomfort does not equal inequity.
The way it could be
Turnover‑proportional margin recovery can give fairer interim outcomes,
but only through deliberate Special Conditions.
The discipline required
Contractual inequity should remain exceptional, not convenient.
AT THE END, the “time risk” is displaced by adjusted tender margin, tested against real cost, real overhead, and real time.
Understanding “The way it is” is essential, not just for valuation accuracy, but for preserving the integrity of the contractual bargain itself.
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“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”
By Matthew Ensoll
Life Member NZIQS. Reg.QS.
Editor New Zealand Building Economist.
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