Growing pains

Growing pains

Total Property - Issue 8 2018

Construction activity has expanded into a record boom. Auckland Tourism, Events and Economic Development says that between now and 2023, $23 billion of new strategic investment is planned, funded and underway in the Auckland region alone.

Back in February, when Fletcher’s Building and Interiors (B+I) division came unstuck, the company issued a statement.

“While our broader construction businesses continue to benefit from favourable market conditions and strong growth, the B+I market sector remains characterised by high contract risk and low margins. Unless these dynamics change, we will no longer work in this sector.”

Geoff Hunt, chairman of the Construction Strategy Group and former chief executive of Hawkins Group, says these comments struck at the heart of the sector.

He says the current environment is highly stressed due to delays caused by skill shortfalls, is dispute-ridden, has onerous contract conditions for contractors, designers and subcontractors, and squeezed margins, which is resulting in an inability for the industry to fix itself.

“Main contractors are being stymied by low margins, unfair risk allocation, delays in variation approval and poorly informed client decision-making from the top down.”

Anchor projects in the Christchurch rebuild have created sector distortion, says Hunt, with some having more pages of special conditions than the standard conditions of the contract document itself.

“Lawyers are basically saying to project owners ‘you can transfer all the risk away to the contractors’ – now that’s not fair.”

The construction sector needs robust contract guidelines and strong communication between all parties to bring back transparency and credibility, says Hunt.

The collaborative approach – particularly around risk and reward – seems to have gone astray in New Zealand, according to Quin Henderson, chief executive and founder of Southbase Construction.

Henderson reflects on the $176 million Otago Corrections Facility project completed in 2007, as a prime example of a collaborative arrangement.

“The parties all agreed to establish fair market labour rates and to manage delivery of the project based on man-hours achieved, bringing labour in from other regional areas to complement local resource.

“That well-procured project was handed over fully-commissioned, ahead of schedule and below budget.”

Henderson says he sees a lot of collaboration among “below-the-ground” (earthworks/utilities) contractors, but this is needed within vertical construction too.

“It’s simply not fair and reasonable for all risk to be shifted completely onto the main contractor without a willingness to accept cost implications nor undertake a collaborative approach to risk management.”

Lead contractor guidelines developed by the Vertical Construction Leader’s Group overseen by the Registered Master Builders Association (RMBA) have been launched to help the industry manage risk better.

RMBA chief executive David Kelly said there was strong alignment from all parties, with robust discussions about the failings of the competitive procurement model.

“We need to move to a relationship model, in which we are not focused on working with the lowest price contractors, but the ones which will be the best long-term partners.”

Tim Fitz-Herbert, development manager for Wallace Development Company, says clients want certainty that their new business premises will be delivered on time and to a good standard, and the financial aspect isn’t everything.

“It is important to our clients that they work with a developer they can trust, has a sound reputation, and delivers as promised, but we face multiple challenges.

“The escalation of construction costs, flattening of yields, limited or no growth in rental rates, and a scarcity of good property suitable for refurbishment or redevelopment is restrictive.”

Fitz-Herbert says that with demand exceeding supply, many subcontractors are charging an ever-increasing amount, which can trip main contractors up on tenders or pricing that may have been undertaken 12-24 months earlier.

A recent forum – Constructive – took the pulse of the sector with a survey of CEOs and senior managers. Over half thought the sector was performing “poorly” or “terribly”, one in five thought it was “good”, and no-one thought it was “excellent”.

The most critical issues identified were lack of skills, risk allocation of contracts, and certainty of work.

Read more market insights from Total Property

Subscribe to receive the latest commercial news and insights from Bayleys Total Property