New Zealand construction industry like a ‘house of cards’
I hope this highly-exposed house of cards does not blow over altogether — and don’t be surprised if there are more prime commercial builders tipping over this year.
Ebert is in receivership, Hawkins (Orange H Group) is in liquidation, and Fletchers is pulling out of the commercial construction market. Expect more announcements before the year is out.
This year has highlighted the very serious financial issues in this market and some far-reaching issues for NZ Inc. If you’re a subcontractor or supplier, you should be watching your customers’ ability to pay very, very carefully — and be all over your Accounts Payable.
As subcontractors and suppliers, we know the situation in which our trusted prime misses a month’s payment, with reassurances and apologies that things will be sorted out the next month. Then before you know it we have two to three months of unpaid bills. Enough to seriously derail a smaller operator.
In some cases (not necessarily linked to the companies that have gone under), we are hearing of firms forced to use future cashflow to fund current jobs, expecting that things will come right over time. Reality comes home to roost when there’s no more money to borrow out of their future pipeline and they cannot keep pace with current job costs.
When a prime fails we so often see the subcontractor fail too. This in turn impacts the subcontractor’s other work sites, and the ability for other contractors to deliver work for agreed prices. This can then tip the balance for other contractors, and the cycle begins again . . .
The interconnected nature of our suppliers, subcontractors and prime contractors within the relatively small New Zealand market means these problems are endemic, and that major failures have a ripple effect on cashflow across the entire industry.
It is a fragile house of cards underpinned by high-risk transactions and IOUs, not unlike a Ponzi Scheme.
The loss of capacity in the market from major primes, such as Fletchers and now Ebert, severely limits the bench of capable suppliers that can deliver big projects within New Zealand.
This is a real problem from a market competition perspective, but also for the ability to deliver assets that drive social outcomes (social housing, Kiwi Build, more medium and high-density housing in Auckland, schools, community facilities etc.) and economic growth (commercial and industrial buildings, hotels, retail etc). There’s a lot at stake. And who is going to want to take on this huge pipeline with risks as they are?
At the heart of it is the perfect storm of a buoyant commercial property market, escalating prices, tight margins and limited resources, where initial fixed-price estimates are not keeping pace with actual costs.
I hope this highly-exposed house of cards does not blow over altogether — and don’t be surprised if there are more prime commercial builders tipping over this year.