Critical stage for construction

We need to learn from the issues facing Fletcher Building, write Geoff Hunt and David Kelly

The New Zealand building and construction industry is entering a critical phase in which Government decision making will be crucial to meet the country’s $300 billion housing, building and infrastructure needs over the next 20 years.

Commercial construction firms and residential developers see the current year as one in which decisions will be made by the Government that lead to potential investment returns meeting risks undertaken in major project development or there will be a steady deterioration in the ability of New Zealand-owned firms to meet demand. As a country we need to learn from the issues facing Fletcher Building and ensure a healthy, skilled and productive construction sector.

The business tensions around risk and reward are bearing in on the commercial, residential and infrastructure sectors of the industry. They are evident just at the time when momentum is needed in the industry to provide for the goals of the Government’s KiwiBuild programme, surging infrastructure demand and calls for new and complex specialist buildings — a new Dunedin Hospital, the sports complex and stadium promised for Christchurch, replacement of the Wellington buildings destroyed by the Kaikoura earthquake.

The Construction Strategy Group (CSG) and the Construction Industry Council (CIC) warned in these pages last October that the industry was at a classic crossroad for New Zealand Inc — that a better framework that enables and supports the construction industry is required. We conveyed our thoughts to the incoming Government in a special briefing paper.

Elements of the concerns facing residential developers and commercial constructors include skills shortages in the sub-contracting sector that lead to cost increases for available trades specialists, onerous contract terms intended to eliminate risk to the procurer and rising demands from banks for financing terms that are unacceptable against potential insurance companies consider the existing situation untenable in the short and mid-term. They consider full de-risk bespoke contracts a threat to contractor viability, hence are reluctant to lend and perceive that this in turn will, and has, encouraged a hardening resolve among contracting firms to resist offered contract terms. A withdrawal of bids by favoured tenderers narrows options for procurers, places them in a non-competitive situation and lifts the risk of a business failure during the construction stage.

Forward estimates of infrastructure spending on housing and buildings under the infrastructure plan call for a spend of $30 billion a year for the period 2017-2022. Gearing up for the work this involves is both costly and time consuming. It is of concern therefore that contractors involved in roading and associated infrastructure work have found it necessary to meet recently with the government to push for early decisions on future work programmes covering the next two years.

Even given the change of government and fresh priorities, delays in settling broad detail of what the industry is expected to deliver are difficult to accept. They add to uncertainties in an industry which performs best when certainty of future work is known.

The residential sector is not immune from such uncertainty. At a time when the Government needs all the momentum it can get in new home building, banks are insisting on more onerous financial terms from developers before agreeing to make finance available. These impositions are reducing returns on investment to the point where developers are openly declaring that associated risks make major housing projects financially unworkable.

Contained also in the briefing paper presented to the Government were calls for early progress in two areas of concern to home owners and commercial constructors. These were for improvements in our policing and regulatory policies concerning nonconforming building products and a modernising of our licensing system for building trades.

Our aim is to have all suppliers state that their products comply with the Building Code so that consumers (commercial and DIY) get the full protection of the Fair Trading and Consumer Guarantees Acts. The discovery of sub-standard electrical cable in an apartment block, rest homes and a school in Auckland late last year highlighted that public safety is at risk from unscrupulous suppliers.

The industry contributes 6.1 per cent of NZ’s GDP and is the fourth largest sector by employment, making up 9 per cent of total jobs. A better framework providing more certainty for local investment is needed if the industry is to remain New Zealand led.

Geoff Hunt

is Chairman of the Construction Strategy Group is President of the Construction Industry Council

David Kelly