Paul Buetow and Katrina Van Houtte, expert construction lawyers at Kensington Swan, reflect on the status of our construction industry.
A healthy construction sector is dependent on a steady and certain stream of projects coming to the market. A survey of the civil contracting sector from May 2019 reveals that approximately three quarters of respondents have concerns about the pipeline of Government and Local Government work for the next three years. The survey comments that the lack of prospective work means uncertainty for contractors and the market.
The infrastructure pipeline is informed by our Government of the day. Seventy-six per cent of civil infrastructure projects from 2018 to 2023 will be initiated in the public sector. However, our three year election cycle means that the industry's prospects can change overnight.
When Labour came into power there was a significant shift in focus from a heavy investment in roads of national significance to a focus on public transport and road safety.
From the industry's perspective there is no inherent problem with either strategy, but roading projects call for a different skillset to public transport projects. Such change calls for forward planning and investment in training and people.
Changes in Government can mean wasted investment. Several major infrastructure projects have been pulled since 2017. These include the East West Link in Auckland, the Tauranga Northern Link and a four-lane highway in Hawke's Bay. The industry had already incurred significant costs in planning and preparing to bid for these projects, which in many cases are unrecoverable.
The works taking the place of these projects have so far come at a much lower value for contractors.
For example, the May 2019 survey reports that very little public transport work has come to the market to date, with only 6 per cent of respondents getting most of their work from public transport, although this proportion will increase with the CRL contract having recently been awarded.
Other positive steps are being taken. In May 2019 the Government announced the Infrastructure Transactions Unit's prototype of a pipeline of anticipated infrastructure projects across five major government agencies. It identifies 174 projects, with an estimated value of over $6.1 billion. It remains to be seen what these projections mean for the industry and how long it will take for them to come to market.
'Build it and they will come'
A major concern for the industry is resourcing. RLB Oceania reported in February 2019 that the construction sector is suffering a critical skills and labour shortage, and will need an extra 57,600 skilled workers by 2026.
Uncertainty in the pipeline creates a chicken and egg cycle for resourcing. Where the Government doesn't invest or there is uncertainty for a particular area of infrastructure, the industry is also typically unwilling (and economically unable) to invest in training and resourcing, as employers are unsure if it will provide a good return and cannot afford to hold labour. But if contractors know projects will happen they will resource. To quote Field of Dreams — if you build it, they will come.
Getting projects off the ground
The procurement of projects is another area of concern. From our work with contractors, we are seeing a repeated lack of clarity from those procuring projects, leading to unnecessary delays and more difficult and expensive bidding processes.
In BDO's 2019 Construction Survey Report, many respondents raised concerns with the quality of design documentation and skills shortages in local government and other professions. These pressures can mean inconsistency and uninformed procurement decisions. They add to the costs of procurement and delivery.
An example is the Christchurch Convention Centre, which suffered huge delays in the bidding process.
In June 2016, the Government announced its decision to leave behind the construction consortium it had selected to build the centre. This had obvious implications for the project as a whole — particularly for those attempting to manage their resources to deliver the project. Another example is the changed procurement that occurred with the City Rail Link.
Part of the issue is principals putting heavily amended contracts to the market with, in many cases, too much risk being transferred to contractors. This adds to the cost of both bidding and the project itself when contractors understand the risk and price it. Often however, this does not occur. The risk isn't priced, either because it isn't recognised, or because to do so may mean not winning the project in an environment where lowest cost is king. Theoretically, the approach has always been to ask who is best placed to manage the risk, but the pendulum has swung too far towards the private sector.
Efforts are being made to improve some of these issues identified. The Government's Infrastructure Commission has been set up, and the New Government Procurement Rules will come into force on 1 October 2019. The Construction Sector Accord, launched on April 14, speaks of better accountability and trust. However, there remains cynicism about whether it will make a real difference.
Although we are seeing more contractors taking an informed approach to risk and pushing back on onerous contracts, we are yet to see any tangible change to the way the Government is procuring its work, despite the aspirations of the Accord.
For real change to occur, the distrust between the public and private sectors has to be addressed.
There seems to be a cultural issue in New Zealand with the idea that the construction industry makes money out of successful projects. This ignores the reality that profit is the return for the risk contractors take on. Contractors are often running at alarmingly low profit margins. While BDO's 2019 survey reported that the gross profit margins for head contractors missing out on contracts has improved from 2018 (the median margin shifting from 5 per cent — 6 per cent to 7 per cent), this is still too low for a strong sector.
Construction is an inherently risky business, so a sensible profit in return is essential to sustain a healthy industry which invests in its workforce and delivers quality projects.
Nothing said above is new, which is why it is a major concern.
The issues noted have been raised many times. Our challenge is to address them. We need to walk the walk and not just talk the talk.