Christchurch paying 15.6% premium on some aspects of $683m stadium

Tuesday, 18 October 2022

After nearly six hours of discussion and debate, Christchurch City councillors voted 13-3 to increase the stadium's budget by $150 million and push on with the project.

Christchurch is paying a 15.6% premium on some aspects of its multimillion-dollar Te Kaha stadium – because the Australian contractor is carrying the cost escalation risk.

The premium is revealed in documents released under official information laws. It applies to some goods and services that were not secured by the contractor when the final stadium contract was signed by the Christchurch City Council in July.

The contractor applied the premium to those goods and services to cover the risk of cost escalation. The contractor had responsibility for this risk, not the council.

The 15.6% premium is higher than a comparable 10.1% escalation forecast made earlier this year by the NZ Institute of Economic Research (NZIER).

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Cost consultants AECOM said in a July report for the council that the NZIER forecast was “lagging significantly behind actuals”. AECOM said they had no problem with the contractor’s premium.

It is unknown what goods and services the premium was applied to, and the value of the premium was withheld due to commercial sensitivity.

What is clear is that it was triggered by rampant escalation across the construction industry.

The stadium’s lead contractor, Australian engineering firm Besix Watpac, initially wanted the council to take on the escalation risk “due to the high level of volatility in the market”, AECOM’s report said.

Stadium chairperson Barry Bragg says the chances of ratepayers contributing more to the project was “very, very low”.

The stadium governance board refused this proposal and requested Besix Watpac provide a price “to fix this risk” – leading to the premium.

Councillor Sam MacDonald said when Besix Watpac submitted its final contract bid around June, about 40% of the project’s material and labour costs were unfixed.

He said paying the premium had paid off as the project had been given certainty.

MacDonald said if prices were not fixed, continuing inflation issues may have led to the council needing to consult ratepayers again in the future.

In reality, the stadium’s $683m price is now enshrined in a fixed-price contract in which Besix Watpac carries the escalation risks.

The stadium’s board chairperson, Barry Bragg, has said the chances of ratepayers stumping up more cash for the project were “very, very low”.

Back in July, the stadium’s independent assurance manager, Peter Neven, described the contract as “a very good contract in this market”.

Cost escalation is a problem facing the entire construction industry. It has been largely caused by the Covid-19 pandemic and the war in Ukraine.

AECOM told the council in July that numerous factors were driving escalation, including:

Global demand for oil outpacing supply
The New Zealand dollar falling against the US dollar
High shipping costs and supply chain issues
A constrained labour market
Significantly increased material prices and lead times

Statistics NZ estimated that construction costs jumped 13.1% between June 2021 and June 2022.

AECOM told the council in July that the stadium contract was in line with industry prices and Besix Watpac had “generally achieved a high level of market engagement”.

Some subcontractor rates were better than local suppliers because Besix Watpac had utilised its international supply chain, AECOM said.

Meanwhile, other documents show some features were added to the stadium’s budget in July, just a week before the council decided to soldier on with the project.

The features were broadcast cabling, a curtain to divide the pitch in half for smaller concerts, dimmable/blue lights, two hydrotherapy pools in the changing rooms, and an “integrated mothergrid” to rig lights and sound equipment from the roof.

All were added into the budget at a July 8 meeting of the stadium board, on the recommendation of future operator, Venues Ōtautahi.

The costs were redacted in documents obtained by Stuff.

The stadium is due to open in April 2026.