2 Aug 2018

Govt contracts push risk to building firms, industry says

11:26 am on 2 August 2018

Construction insiders say the risk contractors are taking in building projects are behind the collapse of a number of firms - and government departments have a hand in it.

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Photo: RNZ / Alexander Robertson

Ebert Construction Ltd has been put into receivership this week and Christchurch company Maven Interior went into liquidation yesterday.

Initial indications suggest Ebert could owe as much as $40 million.

Accounting firm BDO partner James MacQueen said increasingly jobs were "design and build", meaning specifications were given and a construction company worked out how it would design and build it at a fixed price.

These projects carried a higher risk and the government was one of the main culprits, he said.

"It's all about the transfer of risk, and particularly some of the government departments, they're trying to get the risk off their books."

Mr MacQueen said the Ministry of Education was an example.

Independent dispute resolution consultant Peter Degerholm said he was asked to look at a contract from the Ministry of Education in June which had tied a contractor into carrying the cost of the ministry's project for almost three months.

"In an industry that is known to be cash strapped I was horrified that that's the sorts of contracts that the government is putting out."

Mr Degerholm said the government was providing a bad example.

He said contracts went out with scant design detail but with a fixed cost. "In many cases the real cost of construction is not known until the final detail is available".

Independent economist Cameron Bagrie said those allegations are unfair and that the companies should have built margins into their tenders to cover any unforeseen costs.

"Within the construction sector it's pretty obvious there's some issues. To be fair, you can't just point the finger at the government in regard to this stuff," he said.

"If you're tendering on a project, build in a bit of margin for the unforseen. These companies have gotta stand up and take it on the chin."

"There's a whole lot of things that are broken across the construction sector. The two biggest things they're going to face in the next 12 months is going to be cost and access to credit.

"The weaker the sector is, particularly in regard to profitability, the more the banking sector is going to have a good look at them in regard to whether they're going to provide the credit to do the projects."

Mr Bagrie said the sector has a pipeline of work that's "bigger than Ben Hur" but there were concerns over the capacity and ability to get the job done.

Construction lawyer Marcus Beveridge said the situation reflected the thin margin building companies worked on, which may have caught out Ebert.

"It's different building factories for Fonterra in the regions than dealing with the pretty slick and fast rules of construction in downtown Auckland."

Mr MacQueen said head contractor on many projects was more of a project manager, and virtually all the work was done by subcontractors such as electricians, plumbers, roofers, tilers and painters.

One of the most worrying things when a contractor went under was how it affected subcontractors, he said.

"It means a lot of subcontractors are not going to get paid and it results in a bit of a domino effect where those subcontractors end up going into liquidation or receivership."

Mr MacQueen said the folding of Ebert was likely to take out a few subcontractors, which would in turn have a flow through to other companies.

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