There are a lot of big issues facing construction businesses in New Zealand at the moment - to help you navigate these challenges, Nick Innes-Jones and James Macqueen, BDO Construction Sector Specialists, have given their run down of the key aspects to be aware of this coming year. You can also find out about our construction webinar series and register for these events below.
Current disruption
Construction costs are rising, and the spread of Omicron is now creating further issues, as labour and supply chains are disrupted, some building sites need to temporarily close and the price of building materials soar. The consequences are numerous with the delays adding to costs and eroding margins even further.
“The Government has announced a new scheme to keep key sectors going through Omicron, although it does not look as if the majority of the construction sector has been included in this,” says BDO Advisory Partner & Construction Specialist James MacQueen. “This is a shame and will have a significant impact on the economy. Businesses must do everything they can to ensure they are taking measures that will reduce the spread of Omicron in their workplace.”
There are many different scenarios as to who pays the increased costs, with some contracts being pre-Covid, some post-Covid but referring to earlier government settings and many not having clauses to cover the current situation. This will lead to ongoing disputes due to lack of legal clarity which puts further stress on the industry’s cash flow
Inflation pressures
“With the cost of new builds rising, uncertainly over final costs and a reluctance of both purchasers and funders to accept these risks, it’s likely that consents will drop, and some projects will get into difficulty. Fortunately, much of the industry still has a solid pipeline of work, but it is going to be critical for construction companies to carefully plan their forward work pipeline and be alert to the risks in it,” says BDO Advisory Partner & Construction Specialist Nick Innes-Jones. “It’s a good idea to talk to your clients early about their funding arrangements and what products are likely to rise in price over the course of the build so that they understand the costs, and likewise, if there are any supply chain issues with certain products or sub-trades, what the time delay might be for those and what products or construction methodologies you might be able to substitute them for.”
Avoiding the financial consequences of inflation
The financial consequences of supply chain mismanagement and inflation could be dire. There are a number of key areas to focus on in a time of significant inflation:
- Monitoring estimated costs versus actual costs and cost to complete as the job unfolds.
- Managing cashflow properly as the numbers get bigger, from increased bonding, increased work in progress, increased scrutiny and intervention by funders and increased overheads to be covered.
- Finding the right balance between retaining your team and minimising the margin and overhead erosion arising from wage and salary increases.
A silver lining: NZS 3910 to be reviewed
Although the construction sector is facing significant challenges this year, one development that will be welcome is the review of NZS 3910. NZS 3910 Conditions of contract for building and civil engineering construction has not been updated since 2013 and causes significant issues with the allocation of risk. Many within the industry are adding a vast array of special conditions to contracts in order to try and reallocate risk to other parties within the contract, and this is causing significant inefficiencies and unnecessary costs as a result.
The review, which began this year, will hopefully lead to a standard, widely understood contract that requires minimal to no edits, and that will reallocate risk fairly and clearly show what each party is doing and providing. This would allow the industry to document contracts quickly and easily, and address common issues, which would all lead to gains in productivity. BDO has contributed funding to this review and the first meeting has now been held, which agreed scope, timelines and key principles to guide the revisions, which focus on fostering collaboration in the industry.
“Currently the construction sector is far too adversarial – this is how you get people trying to reallocate risk to everyone else,” says James. “We need a sector that communicates and works towards a common purpose – it would lead to projects being completed cheaper and faster, without compromising quality, because there would be more mutual trust, support and open communication. A standard NZS 3910 that is genuinely fit for purpose and is widely accepted would go a long way in helping to change the culture of the sector and create stronger construction businesses as a result.