Pressure builds in construction sector
Too much work, low margins, high risks, tight funding and a shortage of workers have created a construction peak that could see construction firms run out of cash, an insolvency expert says.
Another large insolvency, such as the collapse of Mainzeal in 2013, could shock the sector, while easing pressure on the building sector is only likely to exasperate housing shortages.
Staples Rodway director Tony Maginness, a restructuring and insolvency specialist, said Fletcher Building’s profit downgrade this week could be a sign that the same issues were happening at other construction firms.
Fletcher Building, the company’s biggest construction company, said on Monday its profit could be up to $150 million less than it indicated it would be just three weeks ago, after the cost of two major projects blew out. It was understood the Justice and Emergency Precinct in Christchurch and Auckland’s Sky City International Convention Centre could be the projects.
Maginness said Fletcher had to disclose its issues because it was publicly listed on the stock exchange, but there may be others in the same boat we had not heard about. Some companies were overtrading and becoming the victims of their own success, he said.
‘‘We are experiencing arguably the biggest construction boom in New Zealand history, with the number of projects putting growing pressure on construction firms to deliver.
‘‘There are simply not enough resources to meet this demand, with labour and materials shortages having a significant impact on the ability of construction firms to meet deadlines.’’
Maginness said the boom, caused by the Christchurch rebuild, and demand in Auckland for residential and infrastructure construction, had taken a lot of people by surprise.
This workload, combined with a lack of skilled labour and high building costs, as well as the prominence of fixed-price contracts, meant margins were too tight, particularly for bigger projects.
‘‘There’s no room for error,’’ he said. ‘‘It’s very hard in the construction industry to increase prices because the market won’t pay for them.’’
Maginness said the industry could have done things better but the problem was not going to be fixed overnight.
New retention laws which came in next month would also lead to hundreds of millions of dollars being tied up in trusts during a project, rather than being available as working capital.
‘‘There will be some companies that will run out of cash and I’m not sure lenders will be willing to plug that gap.
‘‘There is financial pressure out there within the industry and that may come to a head.’’