Ebcon principal Geoff Eban, speaking at the NZ Airports Association conference in Wellington: “Some companies are over-trading and becoming a victim of their own success”
An industry in crisis – By Iain MacIntyre
New Zealand’s construction industry is in a “state of crisis of quality”, leaving construction project owners needing to mitigate “huge risks”, according to Ebcon principal Geoff Eban.
Evolving to managing large construction projects at airports after a 37-year career in the airline sector, Mr Eban outlined his personal experiences and research findings at November’s NZ Airports Association conference in Wellington.
Mr Eban described that research exercise as proving “quite an eye opener”, as illustrated by the following notable news media headlines uncovered on recent
construction sector incidents/happenings:
- • “Poor project management blamed for construction budget blowouts” [Fletcher Construction $292 million loss]
- • “If Fletcher Building is struggling, others will be too”
- • “Building boom challenges put Steel and Tube under pressure”
- • “Charges over steel mesh laid against Steel & Tube by Commerce Commission”
- • “‘Report a Cowboy’ app nabs tradies”
- • “New MBIE research shows an extra 56,000 workers will be needed by 2020 to cope with the industry’s projected boom”
- • “Incorrect steel delays Christchurch airport hotel opening”
- • “Many more leaky buildings and faulty fire systems out there – inspector”.
Running out of cash
Quoting an industry insolvency expert, Mr Eban relayed to delegates: “Too much work, low margins, high risks, tight funding and a shortage of workers have created a construction peak which could see construction firms running out of cash. Another large insolvency, such as the collapse of Mainzeal in 2013, could shock the sector – construction companies we have likely not heard about could be struggling. Some companies are over-trading and becoming a victim of their own success,” he said.
“We are experiencing arguably the biggest construction boom in New Zealand’s history, with the number of projects placing growing pressure on construction firms to deliver. There is simply not enough resource to meet demand, with labour and material shortages having a significant impact on the ability of construction firms to meet deadlines.”
Quoting from a Radio New Zealand Insight programme of August last year, he noted: “An unprecedented construction boom is generating thousands of jobs and big profits, but is also inflicting some big losses, exposing a web of weak points in an industry prone to cutting corners on quality and safety. The collapse of the CTV Building and the failure of the 12-year-old Statistics House in Wellington were both because of design flaws.”
The race to the bottom
Also quoting Property Council New Zealand chief executive Connal Townsend, Mr Eban added: “The wheels are falling off. The race to the bottom is being led from the top. Even government projects focus on the cheapest price with little consideration to long-term cost. A collegial approach to tendering might be a better way … there will be a disaster if people don’t understand the importance of this and the efforts that are being made to put it right [don’t] get proper support.”
Albeit clearly spelling out the problems currently befalling the construction industry, Mr Eban equally emphasised a desire to provide positive strategies
to help construction project owners navigate potential pitfalls.
He particularly champions the ‘total quality’ mantra, which entails the key inputs of:
- • Quality people
- • Quality training and development programmes
- • Quality assets, facilities, tools and equipment
- • Quality policy, process and procedure
- • Quality materials and services, just in time Quality legislation, rules and oversight.
Under stress at all levels
Geoff Eban’s observations are validated by Construction Strategy Group (CSG) chair Geoff Hunt – also formerly the chief executive of Hawkins Group – who tells NZCN the construction sector is “under stress at all levels”.
Construction Strategy Group chair Geoff Hunt: “Project owners continue to focus on cheap and maximum risk transfer to the construction sector without realising that the market has changed”
“In part this is due to unsophisticated procurement practices over many years which have focused on cheapest price at all levels,” he says. “In the long term this has precluded companies from investing in staff training, technology deployment and productivity-enhancing equipment, and hence the industry has been unable to properly prepare itself for the boom,” he adds.
“It is telling that CSG and the Ministry of Business, Innovation and Employment developed an excellent set of guides for the procurement of construction projects with a whole-of-life cost focus, but they appear to be ignored by almost all government agencies. Project owners, locked into old-style procurement practices, continue to focus on cheap and maximum risk transfer to the construction sector without realising that the market has changed. Cheap designs with countless consequential changes put further stress on the project teams attempting to deliver efficiently,” he notes.
“The legal profession is doing well, however, as project owners continue to dramatically alter standard conditions of contract to increase risk transfer, and then when they’re called on to support the contractors in the inevitable disputes.”
As a consequence, Mr Hunt urges contractors to “improve their ability to understand and properly price in risk” and construction project owners to both properly analyse the balance sheet strength of potential contractors and to “take care” in their tender allocations.
“Project owners will generally get the supplier performance that they engage,” he states.
Included within the litany of personal experiences of sub-par construction industry performance outlined in Mr Eban’s address were instances of not only non-compliant practice, but also outright documentation fraud.
“There has been comment about companies, operating outside of industry associations, delivering faulty work with fraudulent documentation … there is also counterfeit product in the market,” concurs Mr Hunt. “Regulation needs to be improved and council building inspectors may need better powers to deal with workmanship issues.
“I think these issues apply to a very small number of suppliers, and it would be useful in understanding the extent of the problem if there was better data available from councils.”
Looking at the international scene, Mr Hunt cites a recent McKinsey Global Institute report which purports that the construction industry has been “left behind globally for decades” and that “productivity gains of 50% to 60% were available”.
“New Zealand practice appears to be less mature than other leading countries. A 5% productivity gain would save at least $1.5 billion per year in New Zealand. That is enough to deliver the equivalent of a Waterview Tunnel every year on top of the existing activity,” Mr Hunt says.
“McKinsey identified seven levers for productivity improvement, including design, technology application, procurement, contracts, regulatory and skills training. These changes need leadership from the government, not money.”
However, in that vein, Mr Hunt expresses positivity for the future of the local construction industry. “The construction sector employs about 10% of the New Zealand workforce and people with the full range of training from PhDs to labourers. It is a great industry to be part of and with leadership can contribute more in so many ways to the betterment of New Zealand,” he says.
“The feedback I get is that there is tremendous goodwill in the industry to support change and to do better. Equally, there is enormous frustration with the unsophisticated adversarial contracting framework that we are locked into,” he adds.
“The change of government is an opportunity for new leadership to improve industry performance. We are excited by the possibility of change for the better – we look forward to positive engagement.”
Iain MacIntyre is an award-winning journalist who specialises in transport and infrastructure issues within New Zealand