Uncertainty of future work is the biggest worry in the sector, BDO found. Photo / Jason Oxenham
Uncertainty of future work is the biggest worry in the sector, BDO found. Photo / Jason Oxenham
Covid has driven the $23 billion-a-year construction sector into more risky territory with jobs on the line, uncertainty of future work and low-ball bidding rising, a report out today says.
The BDO annual construction survey said Covid's biggest impact was rising uncertainty about future work because 69 per cent ofrespondents had contracts cancelled or delayed lately.
Falling margins were the second-biggest worry as builders competed against each other with low-ball bidding.
Building contractors said average gross profit margins on jobs were 7 to 9 per cent but, post-Covid, builders were more desperate for work so a few were cutting margins.
A quarter of respondents planned to reduce staff and 42 per cent - twice as many as last year - suffered delays of more than three months on their jobs.
StatsNZ says the building sector completed $22.8b of residential and non-residential work in the September, 2020 year, slightly down on 2019's $23b but ahead of 2018's $20b and 2017's $19b.
The BDO survey said 90 per cent of respondents needed to apply for the wage subsidy, 58 per cent cancelled or delayed salary increases, costs from unreasonable transfer of risk increased, 70 per cent have had a bad experience with an engineer on a contract and 31 per cent reduced or delayed dividends.
"While half of our respondents had work for a further six months, most expressed significant concern about what will happen once this period ends," the survey found.
"Many respondents raised the concern of gross margins falling as the number of new projects coming onto the market becomes scarcer, creating more competition where the lowest price wins. Some industry players are struggling to win work that will enable them to remain profitable. This 'race to the bottom' has been an ongoing concern in the past few years, and has only been exacerbated by the effects of Covid-19," the survey said.
BDO has issued its third construction sector report. Photo / Greg Bowker
A Herald feature in August named some of New Zealand's biggest commercial builders as Fletcher Construction, Hawkins, Naylor Love, Dominion Constructors, Leighs Construction, Mansons TCLM, Haydn & Rollett, Icon, CMP Construction, NZ Strong and China Construction.
Too many companies were pricing low just to win work: "This is likely driven by a desire to ensure a continual flow of work comes through so employees are kept occupied and there are no quiet patches, especially in current times where there may be gaps due to previously secured projects that have been lost or delayed due to Covid," the survey said.
It's not all bad news in the survey: 92 per cent of respondents said they had adequate bonding capacity or ability, 85 per cent can pay their creditors when bills fall due, the forward work pipeline has improved and balance sheet resilience is up.
James MacQueen, of BDO. Photo / Supplied
The survey put questions to about 100 shareholders, directors and senior staff in the vertical, housing, commercial, head contracting and subcontracting sectors. Data was collected in July and August.
James MacQueen, BDO's head of construction, said that up until March, the sector was enjoying an extended period of growth, "the strongest it had been for a decade.
Margins were still tight yet pre-Covid, had been improving.
"That changed when the country went into lockdown and when the economy reopened, some construction projects were cancelled and unfortunately we saw a resurgence of the race-to-the-bottom behaviour, with some construction firms slashing their gross margins simply to secure enough work to survive," MacQueen said.
Because of the strong performance of the sector pre-Covid, most companies still had strong cash positions, he said.
"A positive effect of Covid has been the increased focus on efficiencies, with 51 per cent of those surveyed increasing site efficiencies and 42 per cent increasing off-site efficiencies," MacQueen said.
