Editorial: How did Fletcher Building miscalculate so badly?

Fletchers Building Chief Executive Ross Taylor at the media briefing on Wednesday after Norris stood down from the board following huge losses that were announced to the market. Photo / Greg Bowker

Editorial

The public is well accustomed to corporate calamities on big building projects. Frequently the names on the hoardings change after the original construction company gets into difficulty. But a company bearing the name Fletcher in this country is expected to be different.

It not only represents a proud heritage here, it dominates more than one sector of the construction industry in New Zealand.

How then has Fletcher Building been burned so badly by two major projects, the completed Christchurch justice precinct and the Auckland convention centre under construction, that it is in breach of its banking covenants and its chairman, Sir Ralph Norris, yesterday announced he will be standing down after declaring a loss of $660 million this year?

Obviously, the company has underbid on those projects, and not just them. All told, 14 of the 73 projects on its books are loss-making or on watch. How could a company of Fletcher's scale and resources underestimate the cost of so many projects so badly? Those 14 are by far the largest in the portfolio, with a total contract value of $2.3 billion against just $0.5b for the remaining 59.

"There are a number of issues that conspired," Norris told a press conference yesterday. "One of the issues is, the information flows through to the board were not as fulsome as they might have been."

For that, the chief executive has recently been replaced but Norris rightly accepts ultimate responsibility. It will be a lasting blemish on a stellar career that went from managing director of the ASB to chief executive of its parent, Commonwealth Bank of Australia, and before that chief executive of Air New Zealand.

Fletcher Building has announced it will not be bidding for any further vertical construction work in New Zealand while it concentrates on completing existing projects. It said the building and interiors market "continues to be characterised by high contract risk and low margins," adding, "We will no longer work in these conditions."

"These conditions" include a significant building boom, as Norris acknowledged. But a boom can be difficult for the business, he said, "worse than a bust because it puts stress on subcontractors, services and the like." It made it more difficult to calculate likely costs in contracts. Some of the calculations of quantity surveyors on likely completion cost had doubled.

SkyCity's international convention centre is the classic example. Contracted at between $400m and $500m and with only a quarter of its costs expended so far, it is now projected to cost $887m on completion next year.Fletcher Building is facing a $410m loss on the project.

Taxpayers should be thankful the convention centre is not a public project as originally proposed, because the pressure would now be on the Government to bail it out.

It is better for the economy that these losses fall on the companies that have to assess the worth of a proposed investment against its likely cost. Fletcher and its bankers are making provision for its mistakes and its shareholders will carry much of the cost. It is a salutary experience for all concerned.