'Longest and strongest growth phase in building activity in New Zealand history' - Nick Smith

The biggest construction sector boom in New Zealand's history is posing risks, according to experts.

Chris Hunter, the chief at Auckland-headquartered builder NZStrong, and Tony Maginness, a director of accountant and insolvency specialist Staples Rodway, warned of many risks.

That follows a $110 million profit downgrade from New Zealand's biggest builder last week and the McConnell family's agreement to sell the country's second biggest builder, Hawkins.

Last month, Fletcher Building issued a guidance of a $110m annual operating profit downgrade. Hawkins is to be sold to Downer EDI.

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Hunter said the risks facing the sector were extremely high.

"This is the most dangerous time in our construction cycle. Our supply chain pricing is going up so fast. There's rapid cost escalation in the construction sector and it's putting us at risk if we're not careful with our bidding," he said.

"People are trying to offload the risks to the builder. We're happy to take some risk but we can't take it all on."

Maginness was also concerned.

"We are experiencing arguably the biggest construction boom in New Zealand history, with the number of projects putting growing pressure on construction firms and its supply chain to deliver," he said.

"There are simply not enough resources to meet this demand, with subcontractors, labour and materials shortages having a significant impact on the ability of construction firms to meet deadlines. Some companies are over trading and are becoming victims of their own success."

There was talk of poor workmanship beginning to creep in as a result of the lack of skilled labour available, Maginness said.

Chris Hunter of NZStrong: warning about this phase of the construction cycle.
Chris Hunter of NZStrong: warning about this phase of the construction cycle.

"Fletcher Building is a publicly-listed company with a very strong balance sheet, but they are experiencing complexity and delays on major developments. They have to publicly disclose their issues which is why we have been made aware of this. There may be construction firms in the same boat that we are not hearing about," Maginness said.

Hunter wants more co-operation, with builders working more closely with subcontractors and clients.

"It would be better to work more collaboratively, engage the main contractor and subcontractors in the design process to minimise the supply chain shortage ... and time blow-outs. Getting market-tested pricing early in the design phase will help reduce surprises on client budgets and redesign," he said.

"If subcontractor pricing is not locked in at bidding time, big cost blow-outs can occur. Every week, I get letters from materials merchants, saying prices are going up say 4-8 per cent.

"There might be 27-plus subcontractors on a job. They might only hold their prices for a month yet it might take us two to four months to win the job."

The time taken by clients and advisers to accept tender bids raised the risk of cost increases, Hunter said.

"I've been in up-markets before and this is a more dangerous time for a builder because incomplete or incorrect design creates risk, both time and cost, either at concept design, developed design, detailed design or full construction design.

"The less designed the building, the greater the risk for the contractor and clients."

Some people were asking for a price at only the concept stage which was far too risky, Hunter said.

"We specialise in design and build but I'm trying to avoid concept design phase bidding as no one is prepared to accept an appropriate risk contingency," he said.

"If you're trying to jam in the same old procurement model into this heated market, you're going to have uncertainty and failure to meet clients' expected outcomes. People are saying there are not enough workers but traditional procurement methods create a lot of waste in the industry.

"If a client can provide certainty and involve the main contractor and their supply chain early in the design phase, there will be better availability of resources and more certainty of the result a client is looking for," Hunter said.

In February, Building and Construction Minister Nick Smith said this cycle was unprecedented. "This is the longest and strongest growth phase in building activity in NZ history."

How builders and subcontractors can minimise risk:

• Retentions advice: explore other options e.. milestone payments
• Take personal guarantees where possible
• Register on the Personal Property Securities Register
• Understand the Construction Contracts Act and enforce your rights
• Stop work when you are not paid
• Get variations approved in writing
• Have cashflow projections prepared by an independent business advisor
• Engage a quantity surveyor and accountant to price jobs
• Insolvent transaction advice
• Terms of trade advice
• Quoting - allow plenty of margin. Construction inflation is running at 9 to 10 per cent.
• Allow more time to complete projects and don't sign up to harsh liquidated damages
[Source: Staples Rodway]