Covid 19 coronavirus Delta outbreak: What future for $26b of construction work after lockdown?

The $26 billion-a-year construction sector should tough out this lockdown better than last year, says the author of an annual sector study although prolonged restrictions in Australia caused insolvencies and layoffs there.

James MacQueen, construction sector leader at accountants BDO, said trouble in Victoria showed how extended lockdowns could damage a sector and although he is generally optimistic, he does have concerns.

“The situation in Victoria triggered the collapse of a number of construction companies, particularly smaller ones,” he said.

Next week, MacQueen will release BDO’s annual construction sector survey which in 2019 showed building businesses were bidding for construction jobs on razor-thin margins as low as 6 per cent.

StatsNZ data shows the sector is working at maximum capacity, with consents issued for 44,299 new homes in the year to June 2021 when $26.4b worth of work was consented: $18.7b housing and $7.7b non-residential construction.

MacQueen said there was room for more optimism now than last year because construction recovered fast in 2020.

The Government stepped in with its shovel-ready scheme to boost the sector, keep people employed and ensure firms had good workflows.

“The immediate impact of the first lockdown last March was a loss of confidence and cancellation of a lot of confirmed but unstated projects.

“That then led a lot of companies to indulge in low-ball bidding simply to keep their team employed rather than actually make a profit.

“We now have a better sense of economic activity after lockdowns so I anticipate this will be less of an issue.Further, the level of conformed forward work is now stronger than last March so some parts of the industry should have more resilience,” MacQueen said.

Relationships between builders and developers were mixed, with some developers strictly enforcing contract terms and claiming liquidated damages or financial penalties for late completion, he said.

This put some of those builders out of business last year but other parties had worked more cooperatively.

“Given the level of building activity in NZ, shortage of staff and the impact of inflation, developers and their financiers would be well advised to act cooperatively and not enforce liquidated damages clauses,” he said.

Builders and contractors had to secure their sites fast on Wednesday, he said.

“Companies only had a couple of hours before close of business on Tuesday night to guess the Government response and secure their sites and remove tools and other items easily stolen,” he said.

While the construction sector had been in this situation previously and everyone knew what to do, this could be quite different, MacQueen said.

“The risk of level 4 alert being prolonged is high,” he said.

“There are a lot of companies currently doing projects at very low margins.Many of these jobs were secured at a fixed price when companies were short of work so planned margins were already low.

“Since signing those contracts there has been considerable inflation in both the cost of materials and labour rates so what were low gross profit margin projects have become loss-making projects,” he said.

Some companies would have very low resilience, he believes.

“The lockdown, particularly if prolonged is going to be the final straw and a trigger for collapse.Overheads must continue to be paid and although wage subsidies may help, they are not enough to allow cash-strapped companies to survive,” he said.

Materials shortages – particularly plywood, timber and imported components like appliances – were a known challenge and although the impact has mostly been delays of under two months, the impacts are likely to worsen, he said.

“Even for NZ-made products, the eventual move from alert level 4 to alert level 3 may allow building sites to reopen with physical distancing, there will be some manufacturers that need to wait until alert level 2 so the material shortages may worsen,” he forecast.

Last week, the Herald reported on PlaceMakers detailing big price rises for customers.

PlaceMakers employs more than 2100 people at 62 stores, where it sells 74,000 products and serves more than 300,000 customers a year, but a manager said the year had already seen price increases from many suppliers “and sadly they’re going to continue”.

“The freight and raw material costs are still the main reason, driven by increased demand, both in New Zealand and overseas, and this demand is also continuing to create supply challenges.”

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