Construction subsector trends

Looking more closely at the different groups that make up the construction sector, we can see that some are faring better than others:

Compared to the commmercial and civil sectors, the residential subsector appears to be under particular strain when it comes to forward work security. This is unsurprising given ongoing high mortgage rates are dampening demand - home consents were down by 25% for the year ended March 2024 compared to year ended March 2023, according to Stats NZ.

Many small businesses (fewer than 11 staff) experienced reduced profit margins in the past year.

And while those involved in materials and supply chains have reported the lowest levels of profit margin growth in their sector, they are feeling the most positive about their overall business performance now and into the future.

Forward workload concerns more pronounced within residential subsector

The broader industry trend of concern around future workload security is highlighted when looking more closely at the subgroups within the sector. While 27% of construction business owners and leaders overall don’t have sufficient work beyond six months, this becomes more apparent when isolating businesses involved in residential projects from commercial and civil/infrastructure. Just 38% of residential businesses have sufficient work confirmed beyond 12 months, and a worrying 37% don’t have enough work to last them beyond six months. This is a considerably more challenging position than the one faced by those involved in civil/infrastructure and commercial projects, where the forward workload is looking much healthier.

The Ministry of Business, Innovation and Employment (MBIE)’s latest National Construction Pipeline Report forecasts a decline in the value of residential building activity and consent numbers over the coming years, returning to pre-COVID levels and aligning with the sector’s capacity to deliver occupation-ready buildings. High interest rates, increased costs and borrowing requirements, and lower house prices are all impacting this part of the sector.

BUSINESS FORWARD WORK POSITION

The cost of building has stopped a lot of our future workload

Survey respondent (anon).

Materials/supply chain businesses have longest tail of confirmed work

Meanwhile, construction leaders within materials/supply chain businesses are reporting the longest pipelines of confirmed work compared to subcontractors and head contractors. 56% of materials suppliers/supply chain businesses have sufficient work beyond 12 months, closely followed by head contractors. Only 39% of subcontractors have sufficient confirmed work beyond 12 months (which may be due to more competition in this subsector), while 41% only have sufficient confirmed work for less than six months. This is a much shorter pipeline than materials/supply chain.

MATERIALS/SUPPLY CHAIN BUSINESS FORWARD WORK POSITION

When looking at the size of businesses, those with fewer than 11 employees are under the most pressure when it comes to forward work pipelines, with only 38% saying they have sufficient confirmed work beyond 12 months. These smaller companies tend to be more nimble and agile and are likely more used to having shorter pipelines, but it is still an area to watch out for in the coming months as macroeconomic conditions continue to put pressure on both consumers and businesses.

More business leaders report profit margin increases in residential, head contracting and mid-size businesses

Although margins are tight across the sector, with 41% of construction business leaders reporting a reduction in profit margins in the past year, there are some bright spots. Just under a third of leaders expect to see increased profit margins over the next 12 months, which we can see reflected across the subsectors.

The residential space is where we see the most leaders (29%) reporting increased gross margins in the past 12 months. In contrast, the civil/infrastructure space has had the most strain on gross profit margins, with just 20% reporting an increase in margins and 42% seeing reduced margins over the past year. Labour and fuel cost escalations have had a significant impact on margins in this space, with some business leaders taking on fixed contracts that have made cost escalations difficult to pass on.

With many construction leaders commenting on increased competition within the sector, we may see lower tenders and tighter margins as workloads slow down and businesses fight to secure projects.

Future expectations for gross profit margins are very similar across head contractors, subcontractors and materials/supply chain businesses - but the current position is less consistent. Head contractors have fared the best, with 30% experiencing increased margins in the past year. Meanwhile, far fewer subcontractors and materials/supply chain businesses experienced an increase in profits – and 45% of subcontractors saw a reduction in margins. Increased competition in the subcontractor space could be contributing to their lower margins. These last two groups appeared more concerned about macroeconomic conditions and financial challenges than head contractors, who reported more challenges around labour supply.

Companies on the smaller end of the scale - with fewer than 11 employees – saw tighter profit margins, with just 16% reporting an increase in the past year and a concerning 52% saying their margins had reduced. The mid and large-size businesses were more stable, with most respondents reporting a margin increase, and more positive expectations for the coming 12 months.

Staffing remains a priority, but there's strong confidence in filling vacancies

Companies across the entire construction industry are actively looking for staff, especially businesses involved in civil and infrastructure projects. 83% of leaders in this space are actively looking for additional staff, which is the most of any group, and 68% feel confident about their ability to fill these vacancies.

MORE CIVIL/INFRASTRUCTURE BUSINESS LEADERS LOOKING TO RECRUITRecruitment intentions (next 12 months)

This recruitment confidence is reflected across commercial and residential projects, where most business leaders are feeling confident about filling vacancies (63% and 61% respectively). This is good news for a sector that has recently struggled to secure the right levels of skilled labour – and with few leaders saying they’re overstaffed, there’s hope there won’t be impending mass layoffs as the industry cools.

FEWER SUBCONTRACTORS LOOKING TO RECRUITRecruitment intentions (next 12 months)

Head contractors frequently reported concerns about employee wellbeing, relationships, conflict, and quality. With most head contractors feeling confident about their ability to fill vacancies, it appears that this group’s staffing concerns lie more prominently in training, maintaining relationships with, and retaining their people, rather than pressure to source labour.

Subcontractors and materials/supply chain businesses are still facing staffing issues but seem more concerned with interest rates and cash flow than labour concerns.

[Our biggest challenge is] difficulty recruiting skilled middle and lower middle management employees.

Survey respondent (anon).