Updated: Sep 30
Our industry has largely lived with Fixed Price Lump Sum contracts since the 1980’s demise of labour awards and relatively stable low inflation rates throughout NZ since the 1990’s.
Now Fluctuations are back. Here's a brief reintroduction to Fluctuations, the Individual Verification Method, the Formula Method and thoughts about methods that suit the data and practices of today and will respond to volatile market price fluctuations of 2021, 2022, 2023.
In 1987 NZS3910 replaced NZS623:P (1984) which was a provisional rewrite of NZS623:1964 originally published as a standard contract in 1949. Below is Appendix A Part 22: Market Fluctuations on Contracts and represents the way things were done at least in the 1960's, 1970's and early 1980's.
The Individual Verification Method
The Individual Verification Method, poses a few problems today.
First, it exposes all of (sub)contractor(s) tender IP to the market, something many firms will not feel easy about doing.
Second, there is no individual verification method for recovery of labour costs in a non-unionised / non-pay-regulated workforce.
Third, it is extremely expensive to employ QS resources to conduct the individual verification method in the traditional way, (each and every transaction).
The Formula Method
In 1984 the provisional rewrite of NZS623 that become NZS3910 only included the formula mechanism similar to formulas already in use with the Ministry of Works, NZIA and Registered Master Builders. Designed using Statistics NZ indices and a compilation of the many material components for a full build, it should work fairly well for main contractors but be of questionable value for specialist trades who's cost inputs can be heavily weighted towards smaller range of potentially more volatile material costs, plumber - copper, painter - chemicals, joiners - wood products, windows - glass & aluminum.
2021 and Options that will work today
Start with the Standard Formula Method. Exclude from the value to be adjusted by the Standard Formula Method the value of any component disproportionately represented by the package under consideration e.g. structural steel. World commodities like mild steel, stainless steel, aluminium have prices consistently set by world demand. We all pay the same and there are established published prices for these types of products. Apply an agreed published commodity reference price to your bespoke formula method. For imported materials (most) there is also the exchange rate to factor in. With Freight, Individual verification is best, as actual prices are a case-by-case scenario. Again just exclude the base value of Freight from the contract value being adjusted by the standard formula for a part standard formula, part custom formula, part individual verification method recovery of Market Fluctuations.
The easiest option is to use the indexed formula per 3910. The hope is Statistics NZ's Construction labour indices will keep pace with changes in industry wages. Its their job.
Certification and IP.
Any method not strictly following the highly formulaic approach of Appendix A of NZS 3910, will require some independent verification. A Registered Quantity Surveyor, trained and experienced in auditing tender files and project accounts, is recommended to certify sums as compliant with the agreed method. Contractor IP must be visible to the certifying professional. If the Contractor's tender or accounts IP is not to be disclosed to the client or the marketplace, there is greater reliance by both parties on the capabilities of the certifier to arrive at the correct answer, requiring greater care in selecting the certifier.
“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”
By Matthew Ensoll
Life Member NZIQS. Reg.QS.
Editor New Zealand Building Economist.