Construction company failures highlight the need for change

For quite some time, the construction industry in New Zealand has suffered high rates of business failure and insolvency, with businesses of all sizes operating across all sectors of the industry being affected.

Some high-profile construction business failures this year, with the most recent being that of Ebert Construction going into receivership, leaving employees, subcontractors and people who bought apartments off-the-plan in their developments high and dry, have drawn further attention to the tight margins and other issues facing businesses in the New Zealand construction industry.

As the only specialist Surety Broker in New Zealand, the recent demise of Eberts is not the first insolvency we here at Bonded NZ have seen. Over the years, we have had a few clients run into trouble. Construction can be a risky game with inconsistent cash flow, tight margins, considerable risk of under-pricing to secure a construction contract, and with the contracts themselves containing strict, sometimes even unreasonable provisions that can hurt those who are not careful.

While Eberts was not a client of Bonded NZ, there are rumours in the market that indicate that a major New Zealand trading bank also looks like it will take a haircut as a result of Eberts, as well as the many subcontractors and product suppliers that worked with the failed company.

When a construction business is pushed to take on more than it can handle it becomes over-extended and its risk of going under, and taking others with it, increases.

A sector stretched to capacity
Steady cash flow is essential for any business, but even more so for a business in the construction industry, where there are so many other entities relying on a main contractor in a building project to pay them. Unfortunately, a constant, reliable cash flow is not something too common in the construction industry. Instead, money tends to trickle down the line in fits and starts, putting construction companies and other businesses that rely on them under increasing pressure to stay afloat.

Under-quoting on a construction contract is another major cause of insolvency in the construction industry. The days of being able to win work on low quotes and then vary your way out of trouble are long gone.

In addition, the growing lack of sufficient experienced labour in the construction sector, the rising cost of such labour and of materials, and the often time-consuming and expensive consenting processes for projects are all converging to create what could be the perfect storm for the future of the New Zealand construction industry.

So, as more and more work comes down the construction pipeline to companies already stretched to breaking point, we can expect to see further insolvencies.

Time for change in our construction industry
The recent company failures continue to highlight the shortcomings of the industry. As a result, many industry commentators are saying that we’ll see more cases of insolvency if the industry isn’t restructured.

It’s time the industry, and those who work closely with it, needs to recognise that change is essential for survival. No longer can we simply assume that the old ways of doing things in our construction industry will still work, because they clearly aren’t and won’t.

$200 billion worth of work at risk
The continual rise in dwelling consents, in addition to the construction work to deliver the Government’s promised 100,000 new KiwiBuild homes over 10 years, plus the massive amounts of non-residential building work happening (just look at the Auckland skyline for example and you’ll see all the signs of massive projects underway) is going to continue to put huge pressure on an industry already showing signs of stress.

So, with so much work still in the construction pipeline in the years ahead throughout New Zealand, and especially in Auckland, there are sure to be more casualties among the businesses operating in this country’s construction industry, as construction companies struggle to deal with the demands that are being made of them.

In fact, it is estimated that around $200b worth of work needs to be done in New Zealand over the next few years. So, hopefully the major players in the industry, players such as the big principals, the various Government agencies, and the funding banks can start to work more effectively to help drive the necessary changes to make the industry more sustainable.

Bonded NZ is the only specialist Surety Broker in New Zealand. We offer all our clients expert advice on how to manage their risks and the cost-effective options available to them for doing so. For a professional and informed discussion about the options open to you for protecting your construction business, get in touch with Bonded NZ today.