Knotty time for building and construction

The building and construction sector has come under significant pressure in recent times. Auckland associate director Asheel Bharos looks at the statistics and challenges, and how those in the industry can help safeguard their business.

Time to read: 4 mins

The building and construction industry has remained resilient throughout the pandemic and remains a key contributor to the New Zealand economy. It contributes a good chunk of New Zealand’s overall Gross Domestic Product and as at December last year, employed 282,800 people across New Zealand. A record-breaking 49,773 new dwelling consents were issued for the February 2022 year – a 25% increase from the previous year. 

This growth is forecast to continue to 2026, according to last year’s National Construction Pipeline Report, which forecasts that 265,000 new residential dwellings will be consented over the next six years, at an average of more than 44,000 dwellings a year. 

The report estimates that construction activity will grow steadily to about $48.3 billion in 2024, driven largely by the continued strength of the residential sector. While non-residential building value nationally peaked in 2019 at $10.2b, the report anticipates a return to those levels, forecasting $10.2b in 2025 and $10.3b in 2026. 

Industry challenges

It doesn’t look like industry pressures will be easing anytime soon. We set out the key challenges below, followed with some tips to help your business survive in you're in building and construction.  

Continued increases in construction costs 

In the year to March 2022, EBOSS reported a 34% increase in the price of building materials, while QV Costbuilder’s pricing update for the end of April showed a 20.9% increase in the cost to build a standard three bedroom-home in one of the main centres.   

Workforce capacity 

New Zealand’s COVID-19 border closures were long and restrictive compared to other nations, and changes to New Zealand’s immigration policies resulted in visa processing delays. This increased pressure on the supply of workers and led to wage increases as businesses competed to secure staff. 

Storage issues 

The need to order well in advance is problematic for those who need to secure and hold stock in a bid to ensure adequate supply, and the cost of storage needs to be managed and built into costings. 

Ongoing impact of the pandemic 

Although New Zealand has a highly vaccinated population, people have been infected with emerging strains of Covid-19 as restrictions have eased and the borders reopened, putting more pressure on access to labour. 

Supply chain challenges 

Supply chain issues and competing demands for material have impacted the ability to complete jobs. Projected timelines have been further delayed by the requirement to have new consents issued when there’s a change in the specific materials used for a project. 

Navigating the year ahead 

There are practical steps your construction business can take to help navigate these challenges. The following suggestions have been drawn from working with our clients in the industry: 

Manage your credit risk 

Your customers are also facing increased cost pressures that will impact their ability to pay you. Do credit checks prior to starting a business relationship and get personal guarantees where possible or ask for payment in advance. 

Avoid fixed price contracts 

As you know, fixed price contracts will keep putting pressure on your margins when your cost of materials keeps rising. With constraints on capacity, it is important to ensure you achieve your desired margin on each project. 

Do due diligence on the developers you work with 

The banks have reduced their appetite to lend to developers. This has resulted in cashflow pressure on developers during the construction stage of a project, which can then flow on to the builders and sub-contractors. Check that the developer has sufficient funding to complete your project (and any others they may be working on). 

Avoid fixed completion dates 

Where possible give yourself the flexibility to change completion dates to ensure that you can  complete projects on time and within budget. 

Managing cashflow 

Ensure that your invoices are getting paid on time and actively chase customers who miss payment deadlines. Enter payment plans early with customers who may be in financial difficulty. Talk to your bank about a temporary overdraft if necessary to help ease pressure on working capital. 

Keeping staff 

Create an environment where your staff want to come to work. Adequate training opportunities continue to feature highly in most staff surveys so ensure that your valuable skills and experience are being transferred to your apprentices. 

If you are in a situation where solvency is (or may become) an issue, our expert team can guide you through the available options to get your business back on track. 

For more assistance, contact your advisor or local Baker Tilly Staples Rodway office.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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