How to get our construction industry back on track

Over the past few years, building projects in the New Zealand construction sector have become as difficult to predict as the Auckland weather. One minute it’s all going smooth sailing and the next minute it’s all panic stations as things go belly up and a construction company fails.

Traditionally, the construction industry has reflected the overall boom-to-bust cycle of the broader economy. Currently, however, companies in the construction sector are going bust despite an overall economic boom and unprecedented demand for building projects of all shapes and sizes. Clearly then, something is not right in the way the New Zealand construction industry is operating.

Ultimately, however, the construction industry forms a crucial part of the backbone of our economy. A strong construction sector is vital for the future of a strong and prosperous New Zealand. It is therefore imperative that we make a concerted effort, without further delay, to get our construction industry back on track.

Practices derailing our construction industry
Risk management, and more specifically how we allocate risk, is what lies at the heart of the current crisis threatening the long-term viability of this country’s construction industry.

On one side of the current unstable environment in the New Zealand construction sector is the tendency of construction companies to pull out all the stops to submit the lowest possible price when they tender for a project. However, even a seemingly straightforward project could be hiding a whole raft of challenges that will force plans to change and the need for on-the-job improvisations, all of which will pose a serious threat to that tight margin.

So, going in with the absolute lowest possible price is not the way to properly manage your business risk. Committing a construction business to unreasonably tight margins, especially on challenging projects, is a recipe for disaster, because when things change or snags are encountered there’s very little wriggle room left before it all goes horribly wrong and yet another contractor faces going bust.

On the other side of the current environment is the practice of developers to screw down the building contractor in every possible way on a development project. Not only is this short-sighted for the developer’s project, but it’s resulting in a steadily shrinking pool of financially strong contractors in New Zealand. This risks the viability of the development projects themselves and threatens the overall stability of the country’s construction sector.

3 things that can be done to help get our construction sector back on track
1. Developers should stop chasing the lowest possible contractor price – cutting a contractor’s margin to the bone to enable them to get the job could very well prove more costly for a development in the long run. Remember the adage, “you get what you pay for”.

2. Developers also need to stop the tendency to require a contractor to carry unfair risks, for example the developer being able to make design changes without the contractor being allowed to make a variation to their contract price.

3. It doesn’t always make sense to insist on having a tender process for every project – a process that naturally drives the lowest-possible-price mentality. Often it is simply better to go with the contractor with a reliable history and a reputation for quality work, even if it means paying a little bit more. Again, remember that adage of “you get what you pay for”.

It’s time to change our attitude
Having a construction industry in which there is a pervading obsession with saving a (relatively) few dollars at all cost and a mentality of holding contractors to ransom, as it were, with unfair contract conditions will simply continue to reap the consequences of such short-sightedness.

A far better outcome will be achieved by focusing on getting the right contractor for the project, and doing so at a fair price for the job and subject to fair conditions.

Helping you manage risk in your construction business
It’s imperative that every contractor looks after the long-term health of their business by doing everything they can to properly manage risk so they can remain a viable operator in our construction sector.

Bonded NZ is the only specialist Surety Broker in New Zealand. With our range of Surety Bonding and Building Warranty products, we specialise in helping firms in the construction industry manage their risk so they can successfully complete the projects they work on. For expert advice on the options available to you to protect your construction business, get in touch with the team at Bonded NZ today.