Construction ‘race to bottom’
Top industry boss believes the way in which contracts are procured needs to change and risks shared
Competition has pushed the construction sector into a “race to the bottom” where companies are taking on projects to win revenue rather than chase profit, says a top industry boss.
David Prentice was chief executive for seven years of NZX-listed Opus International Consultants, a multidisciplinary infrastructure consultancy with 3000 staff that was bought by Canada’s WSP Global in December.
Prentice, who is now leading the integration team at WSP Opus in Wellington, did not wish to comment specifically on issues at Fletcher Building, which last week announced further losses of $660 million at one of its divisions and said it would not be bidding on any new big projects.
But speaking about the construc- tion industry generally, Scottish-born Prentice told the Herald earlier this month that the building market was becoming increasingly challenging.
“To design a building 20 years ago you’d need top structural engineers, your top architect, your top mechanical and electrical engineers. Nowadays a lot of this can be done using computer packages and what have you. So what it’s doing is it’s commoditising the design away from almost an art to a science,” Prentice said.
“And what that means is that the margins that can be made on vertical infrastructure such as buildings is far less than it was before, therefore the need to make sure that you’re absolutely on point when you come to do that work is essential because very quickly a very small margin can turn into a very big loss,” he said.
“You always want increased competition but as long as increased competition isn’t a race to the bottom. Unfortunately it has been a race to the bottom so people are going in incredibly tight to actually win revenue, so they’ve been chasing revenue as opposed to chasing profit.”
These issues weren’t isolated to New Zealand and around the world people in the building sector were having to work harder “to make an honest buck”, he said.
Prentice believed that the way in which contracts were procured needed to change as right now the client or customer was pushing all the risk to a consultant or contractor.
“The best contracts without a shadow of a doubt are those contracts where risks are explicitly shared between all three parties, consultant, contractor and client . . . I think the client and the customers, particularly central and local government, have got a long way to go in respect of maturity in how they procure projects.”
Prentice’s comments were echoed by Registered Master Builders Association boss David Kelly.
“We need to work with government to improve the way we manage pricing and risk in our sector,” Kelly said. “Government procurement should not be an exercise in one party minimising all their risk. At the end of the day, all parties need to commit to working collaboratively and equitably to deliver on a project. Anyone building or renovating a home, let alone a multimillion dollar construction project, appreciates that there needs to be some flexibility in adjusting for costs,” he said.
“We need to move away from focusing on cheapest initial price — this never gets the best result, limits innovation and stifles research and development,” he said.
In the wake of Fletcher Building saying it would not bid for any more big construction work, Auckland Airport chief executive Adrian Littlewood said any company with big projects would consider using overseas firms.
“We . . . would like to see a proper and well functioning construction industry [here].” Overseas firms would have to draw on New Zealand subtrades if they were involved in big projects as it was difficult to import all the skills.
Auckland Airport is spending $1.8 billion over five years on building infrastructure and Fletcher Building is involved in one phase of the Airport’s big build — the international departures terminal.
Littlewood said Fletcher’s focus on completing projects was important for his company.
The demise of certain highprofile large construction projects was one of the talking points in the media in the second half of last year. Why did they occur and how can we ensure 2018 is not marred with the same issues?
This is not something the industry can solve alone. We need to work with the Government to improve the way we manage pricing and risk in our sector. Government procurement should not be an exercise in one party minimising all its risk. At the end of the day, all parties need to commit to working collaboratively and equitably to deliver on a project. Anyone building or renovating a home, let alone a multimillion-dollar construction project, appreciates that there needs to be some flexibility in adjusting for costs.
I am not across all the detail, but the Christchurch Justice and Emergency Services Precinct, the Metro Sports Centre and the New Zealand International Convention Centre (NZICC) show that some aspects of the current contracting model may not be fit for purpose.
More collaboration is needed between Government and industry to understand risk and how to balance it. It is not just an issue for NZ. Carrillion’s collapse in Britain has highlighted shortcomings in how procurement is managed there too.
We need to move away from focusing on cheapest initial price — this never gets the best result, limits innovation and stifles research and development. Technology and innovation are central to addressing problems that have become inherent in the construction sector, which means the Government needs to be more realistic in pricing contracts.
Megan Woods, the Greater Christchurch Regeneration Minister, spoke positively about the need for change, saying we cannot stick to the same old approaches and expect different outcomes. The industry agrees that things need to change.
Early contractor involvement is one way to identify potential issues and be realistic with costings.
However, it is not the silver bullet and cannot substitute for people with experience in the industry who know how to get value for their clients without passing on all the risk.
We also have some good examples that show how things can go well. NZTA’s approach to procurement is cited as an exemplar by some major contractors. Many university and DHB projects have been successful. Much of this stems from them having people who understand the process and there is a mutual understanding about the realities of contracting.
In the current construction boom, there is a plethora of projects to bid for. And with the recent damage to some high-profile companies, the sector is getting smarter. Construction companies will walk away from a project if they are not fairly procured.
The issue is not only with commercial building. It also concerns residential, with a need to educate homeowners as well as the industry about pricing and taking a “whole of life” approach to everything we build.
NZ needs to get this right. We will keep talking to the Government and welcome your input.