7 Mar 2018

NZ construction woes just beginning - UK expert

7:56 am on 7 March 2018

Quantity surveyors are calling on the government to take action in the face of a hugely risky construction market.

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Photo: 123rf.com

At the same time a UK construction expert is warning that the Fletcher Building and Interior Unit's failure, and the liquidation in Britain of conglomerate Carillion on the back of massive construction losses, show the global industry is in very perilous straits.

"This is a real wake-up call," said Mark Farmer, who is visiting this country with building research group Branz to talk about the construction crisis.

"The firms that made up Carillion date back in the UK over 200 years and all of a sudden they are no longer in the industry. So this is something that is not just a transient thing, this is a long-term structural thing."

Construction Minister Jenny Salesa is meeting next week with Fletchers to discuss building capacity issues and to get a briefing on its situation as it winds down its billion-dollar building unit.

The Quantity Surveyors Institute wants its say too.

Institute president Barry Calvert is preparing a briefing for Ms Salesa about his sector's plight within an industry at a critical juncture.

"It has got to that point and I think the area of risk transfer, particularly, is highlighted in the recent issues around Fletchers," Mr Calvert said.

This issue of risk transfer - a risk management technique where risk is shifted from one party to another - crops up again and again among industry insiders rattled by the biggest of all the country's building companies to get it right.

Just last August the previous Infrastructure Minister Steven Joyce told a major industry conference that the current building boom was much more sustainable than in the past, adding: "I would say there's a much greater understanding of the ability to transfer or not transfer risk - and what you end up doing - than there was three years ago.

"I think we've come quite a long way in the last five years in that space, and whole-of-life (as opposed to cheapest price wins) has become the mantra," said Mr Joyce, who has often been called National's 'Mr Fixit'.

Yet by last month, this was how Fletcher chair Sir Ralph Norris put it, when he quit as chair on the back of a billion dollars in losses: "The changing environment around contracting, particularly in the B&I [Building and Interiors] business in the way that risk was transferred from clients to B&I was obviously a significant factor in this."

Among the biggest of Fletcher's clients was, ironically, the government itself: witness the listed company losing $150 million at least on the Christchurch Justice Precinct.

The risk transfer there revolved around what's becoming more common - clients paying for much less design before they go to tender, but still asking for a fixed-price type bid regardless.

Sir Ralph also singled out quantity surveyors for being 100 percent off in their estimates. However, it becomes increasingly difficult to estimate a job when fewer and fewer factors are finalised.

Where previously the client paid to get a schedule of quantities drawn up which formed the basis for a contractor to arrive at a tender price, that was happening less and less, transferring more pricing risk to contractors, Barry Calvert said.

"If you talk to most of the contractors around the country, they would all say that they are having to add significant amounts of money to cover the risk that they are being asked to cover. Both the private and public sector clients have not been actively trying to make the situation better."

Ms Salesa could begin there, by moving the government away from unfair risk transfer and from a system that favoured the lowest priced tender, Mr Calvert said.

The minister declined to comment until she had heard from Mr Calvert.

Mr Calvert had sought feedback from his industry.

"Time and time you see the design process has taken years to get to the point where tenders are called. You are invited to tender and given four weeks to formulate a price," a major central North Island contractor told him, in an example where there was plenty of design, but little time to assess it all.

"In that period you have to understand the documents and interpret what is requires ... measure off the quantities and price it. A recent project had a 1600-page specification and 733 drawing sheets."

Some clients were now imposing such onerous conditions on contractors "to the extent of making a mockery" of established contracting standards that provided a document that was fair to both sides, a lower North Island contractor said.

Mr Farmer said underlying all those other factors was the crisis of an ageing labour force.

"The nature of the skills crisis makes this different to what we've seen 10 years ago, 20 years ago when we've had similar cycles," Mr Farmer said.

"This is something that's here to last, it's not going to come and go. This is a long-term decline in ability of tier-one contractors to control outcomes because there's less and less people out there that are competent to do the work."

Chelydra Percy of Branz said the vacuum that Fletchers' failure had left behind might look attractive to local and overseas firms, but it came with a big warning.

"We should be concerned about the financial fragility of our construction businesses in New Zealand."

But if European or Chinese firms tried to step in, using the same model the would have the same problems: "Globally, this industry is in crisis," she said.

Steven Joyce did not respond to a request to comment on his past statements about how much better risk transfer and government procurement had become.