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If the construction industry is honest, it will acknowledge that the company failures and the financial stresses that some are experiencing are part of an environment to which they have also contributed

The best of times, the worst of times – By Malcolm Fleming

The construction sector is a curiosity to many outsiders. The public struggles to reconcile why there are numerous companies across the construction supply chain that are experiencing financial stress, and in some instances failing, in an environment in which the current and forecasted construction activity is perceived to be extremely buoyant.

Despite there being lots of building work, some companies charged with designing, documenting and constructing our buildings are failing to be profitable. To borrow the classic Charles Dickens line: it is the best of times for the wider industry in terms of work opportunities, while many sector participants are experiencing the worst of times. That some of the ‘hurt’ has played out very publicly has led to a deepening of the curiosity factor.

In addition to the financial stress that some companies within the construction supply chain are experiencing, we are seeing productivity issues emerge, reflecting an industry operating at capacity. We are therefore witnessing parallel themes: evidence that our companies lack financial resilience; and that our sector is struggling to get through the work we are engaged to produce. From a client perspective, these attributes create risk and uncertainty, both of which are expensive.

The twin issues of poor productivity and low profitability feed one another – i.e. companies that have poor productivity will naturally struggle to be profitable, while those who are not profitable will find it difficult to invest in innovative new processes and technologies that will raise productivity. And so the cycle continues.

How did we get here?

There is a myriad of factors at play, one being the comparatively recent rise of onerous contracts being utilised by clients at the recommendation of a new generation of advisors, some of whom are bringing international conventions with them.

At the more extreme end of the risk spectrum, some contracts require builders to price for work for which the design has not been finalised. The New Zealand construction sector has been found wanting in its ability to identify risk and/or to price for it when presented with these styles of contracts, many of which accompany construction documentation that could not be described as fully resolved.

A more longstanding issue is the prevailing view that all consultants and contractors are a standard commodity that should be procured at the cheapest price – i.e. clients are not recognising any discernible difference between offerings.

Procurement has, therefore, become a matter of some clients shifting as much risk onto the construction supply chain as they can while seeking the lowest design and construction cost to see the asset realised. This view has led to businesses failing.

The industry itself sees that procurement behaviours lie at the core of the problem, and that the New Zealand government, as a significant procurer of construction projects, has a role to play in raising competencies and approaches to how its agencies engage the construction supply chain. That view is legitimate; the government, with a few exceptions, is viewed to be a poor procurer with an unbalanced and unreasonable approach to risk.

We are all to blame

If the construction industry is honest, it will acknowledge that the company failures and the financial stresses that some are experiencing are part of an environment to which they have also contributed.

We have let the procurement goalposts be moved, without pushing back to the degree we could have. We have not had the ability to identify and price risk appropriately, a contributor to which is poor information being provided to those tasked with pricing the work.

We have lacked the confidence and skills to promote high-performance capability as a benefit that outweighs lower pricing. We have failed to educate clients that the acceptance of the cheapest-priced consultant/contractor creates risk for them. Such procurement leads to poor documentation from the design consultants, a poor performing supply chain (you have engaged the B team), and/or the risk of a contractor failure during the contract.

All these outcomes are costly to the client.

What then is to be done?

Given that the construction sector effectively builds and maintains the foundations on which our country’s economy runs, the current risk apportionment environment, matched with the property sector’s traditional lowest-price approach to procurement, is setting NZ Inc up for failure.

Our houses, buildings and infrastructure should be built to last, by companies within the sector that are themselves built to last, and who are committed to ongoing innovation adoption.

To that end, the subject of commercial risk, what is acceptable and where it should be apportioned, along with the promotion of ‘asset lifespan’ procurement measures, rather than lowest ‘cost to build’, is a focus for the New Zealand Institute of Building (NZIOB), as it is for several other industry associations.

Education of the construction supply chain on the topic of risk assessment, how to identify and how to price for it, is a key strategy to ensure we have a healthy and resilient construction sector. Encouraging companies to place greater emphasis on ensuring profitability while also raising productivity is another.

Equally, educating the property sector to move past ‘lowest cost’ procurement policies is vital if the aim for New Zealand is to have the built environment it deserves – one of quality and durability. The New Zealand government has a leading role to play in putting in place exemplar procurement practices that commercial procurers can emulate.

With forecasted work volumes at historical peaks, the construction sector has a golden window of opportunity to shift procurement policies. If action is not taken now, it is likely that entrenched behaviours will endure.

Malcolm Fleming is the chief executive of the New Zealand Institute of Building (NZIOB), a professional membership association that represents practitioners who are involved in the design, documentation and delivery of construction projects

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