While the future is looking bright, it’s critical that in a changing construction landscape, businesses, developers and contractors are covered against potential risks
From boom to bust – the ever-changing construction sector and its impact on your business – By Mark Taylorson
The current state of the construction industry seems to be something of a paradox. On one hand we have a buoyant sector with players flourishing and achieving year-on-year growth. On the other we see a string of business failures leaving behind a trail of destruction and huge sums of money owed to stakeholders and subcontractors.
There are many opinions around the cause of the instability in the sector, but one factor we have noticed is more short-term thinking by businesses, rather
than a strategic long-term approach.
Labour shortage is a key example of this. No, it’s not an easy fix, but I’d be interested to know how many firms are investing in apprenticeships, in the way they used to, versus the number bringing in multiple contractors or subcontractors. Additionally, contracting conditions and the inequitable allocation of risk is also an area of concern, with an increasing trend of project risk pushed towards contractors and subcontractors.
A common misconception about contractors is that there is always a completely level playing field between parties to the contract and that, in the event of a project failure, the blame should lie solely with the contractor. In some instances, this may well be the case, but to think the overall blame is in the hands of the contractor alone is naive.
Contractors often suffer because they are expected to take on the significant risk for a modest margin. But there are many different parties in a project from start to practical completion and so, again, the issue comes back to contract conditions. Interestingly, we are seeing more contractors walking away from tenders, with a stronger realisation that extra caution needs to be taken before signing up to jobs.
There are many other big challenges that developers and contractors encounter when completing a project and often it’s unforeseen circumstances, such as landslips, asbestos discoveries and pipe damage, which throw people off. When events such as these occur, the whole project must shift and there can be major repercussions. Unfortunately, that’s the business of construction, but it’s still frustrating for those involved.
The good news is that there is hope for our industry to bounce back from what has been a significantly turbulent period. Earlier this year, MBIE (Ministry of Business, Innovation and Enterprise) released the Government Procurement Rules 4th Edition for consultation.
This includes a focus on ethical and sustainable procurement behaviour, an increased focus on risk allocation and standardisation, consideration of the level of ‘public value’ to be delivered by projects, and an emphasis on comprehensive procurement planning and processes.
On top of this, we’ve also now got the advent of the Construction Sector Accord, a heartening show of collaboration between the public and private sectors. The aim of this is to ensure not only a sustainable future for New Zealand’s construction sector, but also one which grows stronger. The accord hopes to do this by addressing key issues like the skills shortages outlined above and incubating capability in the industry, reviewing the procurement model, improving risk management, improving regulatory systems, and working on the quality and durability of our housing, to name a few. To see such a commitment to bettering our industry is good news for Kiwi construction businesses.
Protecting your business
New Zealand has large-scale infrastructure projects operating right across the country in areas like Wellington and the rebuild work in Kaikoura and Christchurch. Our economy is still growing, with plenty of foreign investment coming in. Cities like Auckland, where we are seeing a growing population, provide plenty of opportunity for New Zealand businesses operating in the construction market.
While the future is looking bright, it’s critical that in a changing construction landscape, businesses, developers and contractors are covered against potential risks. There are a number of assurance policies to protect companies and help them avoid being left out of pocket or in hot water. These include but are not limited to:
- • Advanced consequential loss (ACL) – protects companies if project completion is delayed, which often results in costs incurred; this should be one of the first items on an agenda when forming a risk management strategy
- • Environment impairment (EIL) – insures companies against risks arising for past or current operations that impact the environment, including claims for clean-up, bodily injury and damage arising from pollution
- • Contract works – provides cover for accidental damage and theft on construction sites
- • Public liability and professional indemnity cover – protects against damage, injury or financial loss liability
- • Trade credit insurance – provides cover for the risk of non-payment of trade debt
- • Surety bonding – provides uncollateralised protection to the project principal; various products are available, such as retention and performance bonds.
Every company is different, so in order to make sure your business is in a position to make the most of a boom or to avoid going bust when a crisis hits, it’s important to have the ‘what if’ conversations with key decision-makers in your business – and to have them early.
If you’re not sure where to start, chat to a broker who can help you assess your needs.
Mark Taylorson is the group broking manager and head of construction for Crombie Lockwood, one of the largest insurance broking companies in New Zealand crombielockwood.co.nz