Construction delays fears grow as 'perfect storm' intensifies

Friday, 27 August 2021

Thousands of construction workers are waiting to resume work under a socially distanced Level 3. The building sector is being dogged by a “perfect storm” of building material delays, labour shortages and now another lockdown.

Builders are praying for a swift return to Level 3 as a new survey highlights the consequences that many building firms are facing if they can't keep their project on schedule.

Everyone's timelines will be behind, says Auckland president of Masters Builders Tony Pexton.

“Getting builders back itself is pretty easy, but it’s whether we can get that subcontactor that we need will be the next question or that supply we need or the inspector or concrete that we need.'

BDO's lead advisory partner on construction, James MacQueen, said business had boomed in the sector since last year’s lockdown, but “a perfect storm” of inflation, delayed building materials and labour shortages meant it was also facing greater risks.

Chris Long, owner of Long Building Solutions, talks about successfully implementing a four-day work week for him and his staff.

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“I've got clients who are already turning down jobs. Because the challenge is there's not enough people doing the work, and not enough people to supervise and the last thing you want to do is take on a project you can't properly supervise.”

Chairman of the Construction Sector Accord Dean Kimpton said last week that by now, many builders would be talking to their clients to avoid penalties for delays.

Some builders had also started putting “pandemic clauses” in their contracts to ensure the costs of delay were better shared around.

The wisdom of talking to clients had been proven during the last lockdown, Kimpton said.

The accord had done 'a lot of work with the government suppliers, particularly central government but also some of the large local government ones, and we got them effectively lined up with as common an approach as possible and that took a lot of tension out of that debate.'

“…We're saying, be open, talk early and look to take a fair approach.'

Construction worker in the Auckland CBD after the first lockdown last year.

A report released yesterday by BDO underlines how much building supplies and labour shortages are now taking a toll on the industry.

Penalty clauses for delays are a real risk, but developers should think twice before enforcing them, says MacQueen.

A surge of stockpiling and ordering materials in advance had helped some firms and made things worse for others, driving up the price of materials even more.

“Many of the cost increases are now in double digits.”

Over a half of firms surveyed said projects were being delayed by building materials not arriving, with a third of these saying they were taking longer than two months.

And as a result, many were losing money where they could not pass on the costs to clients.

“Some companies are already making losses on projects where profits were previously envisaged,” BDO said.

Many contracts had been set on fixed costs when price inflation was still low, and the industry was going to have to rethink how to ensure builders were not penalised for things which were out of their control.

“Many have already rethought and changed the way they negotiate and manage this risk for new projects, while others are struggling to find a solution that allows them to win work but not commit themselves to absorbing unquantifiable cost increases. The industry is yet to find a suitable solution.”

However, developers needed to “think very carefully' before they started enforcing penalties for delays, known in the industry as liquidated damages, MacQueen said.

“If the client's going to enforce it, and it puts too much pressure on the construction company, why would they bother finishing it? If you do liquidated damages that puts the construction company out of business, you've got a 10-year guarantee on a building and no construction company.”

The other key factor in the delays was a searing shortage of both labourers and highly skilled workers, which had been heightened by the border closures and visa issues.

This was creating uncertainty for building firms over whether they could fulfil their pipeline of work.

Half the report’s bigger firms said they would be “massively disrupted” if existing work visas were not renewed for workers or replacement migrant workers not permitted to enter the country.

Longer term, there was a looming wave of experienced construction staff looking to retire over the next decade, it said.

“Complex projects need the experience that is gained on large overseas projects. That knowledge can then be passed onto the New Zealand workforce.

“Servicing specialist equipment also often needs people to travel from overseas. Without access to their expertise, we are continuing to inhibit our productivity growth and transformation of the sector.”

Although 21 per cent of projects were being completed very late, that is delayed by more than three months, BDO said the number of project delays was actually on par with 2019 levels.

They were generally finished in under three months.

Soaring building costs were also reflected recently by CoreLogic’s Cordell Housing Index Price, which showed that residential construction costs were now running at 4.5 per cent annually, rising 2.2 per cent in the June quarter alone.