Fletcher’s roading success
Beleaguered in commercial building, Julie Iles looks at an area where Fletcher Building is thriving.
Fletcher Building’s infrastructure revenue has sustained the company through nearly $1 billion in losses over the last two years.
So what is it about the way the company approaches ‘‘horizontal construction’’ that is so much less dysfunctional than its vertical arm?
Naylor Love chief executive Rick Herd said infrastructure projects benefit from having a smaller pool of clients and contractors and ‘‘more sophisticated’’ procurement techniques.
‘‘In the infrastructure sector the margins are a lot higher and risks are easier to manage because people have stronger relationships with fewer clients,’’ he said.
In 2017, Higgins Contractors, part of Fletcher’s infrastructure arm, procured two of the Government’s five most expensive infrastructure contracts.
The two contracts were procured after news of Fletchers massive losses started to become public.
The NZ Transport Agency (NZTA) awarded the $91.3m contract for highway maintenance in the East Waikato in October, and Hawke’s Bay $8.3m SH50 roundabout and 1.38km road maintenance contract was procured in December.
Infrastructure New Zealand chief executive Stephen Selwood said risky contracts could backfire on builders but ‘‘alliance contracting,’’ where losses were shared, was more common in the infrastructure sector.
Alliance contracting is when the procuring organisation and the construction company agree to the final cost of the project, identifying the risks that need to be managed.
Once the project is underway if costs start to rise unexpectedly, the costs are shared between the client and the contractor, and if the project runs under budget, the savings are shared too.
‘‘What that does is incentivises both parties to work collaboratively to resolve problems,’’ Selwood said.
But the practice is rare in commercial high-rise builds, where more often risk is swallowed by construction companies that have signed ‘‘fixed-term contracts’’.
Herd said his company refused to bid on some of the projects that Fletchers was hired to build because the contract’s conditions were ‘‘unreasonable’’.
He said commercial or ‘‘vertical’’ building was a far more ‘‘fragmented’’ industry than the infrastructure sector.
‘‘In the infrastructure sector, the margins are a lot higher and risks are easier to manage because people have stronger relationships with fewer clients.’’
‘‘When you’ve got a very fragmented industry you only need one or two players who are silly enough to take on those risks and it pushes the margins on everything down... it means that consultants and buyers feel comfortable offering contractors risky offers because they think it’s reasonable.
‘‘The only thing contractors can do is refuse those offers.’’