Construction industry with labour shortage faces uncertainty over work

Wednesday, 12 April 2023

Almost 70% of builders surveyed in the residential construction sector have faced reduced profit margins, compared with 45% doing commercial work.

The construction industry still has more work than it can cope with, but a significant number of building companies are worried about a future slow-down.

The BDO construction sector “beyond boom and bust” report found that, although there was plenty of work on, there was not enough staff to do it, and almost 80% of respondents said labour was their biggest challenge.

But rather than turn down work due to lack of labour and materials, businesses were taking longer to finish projects, with only 12% completed on time in the previous six months.

Larger construction businesses with turnovers of $10m-plus made up the bulk of respondents to the survey done at the beginning of the year, and one in five was concerned about the level of project cancellations.

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Christchurch's Parakiore Recreation and Sport Centre has faced multiple delays in its opening date, and the fixed price contract is the subject of claims to cover escalating costs.

Uncertainty about the pipeline of future work was greatest amongst smaller operators, and more than a third needed more work, or only had sufficient confirmed for the next three months.

Uncertainty was more prevalent in the residential sector where one respondent noted that the risks around cost escalation and long delays in completing housing developments were now so great, they were considering cancelling building projects due to start this year and next.

Just over 40% of respondents to a construction industry survey said that they only have enough work for the next 6 months or needed more work. (File photo)

Erosion of profit margins was also more of an issue for the residential building sector where 67% reported this was a problem, compared with 45% of those doing commercial work, and sub-contractors were more affected than head contractors.

Despite widespread expectations that costs would increase by up to 10%, more than half respondents said the vast majority of their customer contracts were fixed price.

BDO construction sector leader Nick Innes-Jones said to avoid the boom and bust cycles the industry was prone to, risks needed to be shared, rather than transferred to another party.

“This is a significant issue for construction businesses, who are carrying all the risk of inflation on their shoulders.

“More productive conversations around contracts are needed across the industry, as well as a wider appreciation of risk.

“The whole industry, including clients, must work together to ensure risk is distributed fairly and according to who is best placed to manage it.”

Innes-Jones said labour shortages, lower margins from higher costs, and declining house prices were particularly challenging for residential builders and smaller businesses, but they stood to benefit from the repair and insurance work resulting from recent weather events.

Productivity was also adversely affected by Covid-related rules which meant the preference for staff to stay home if they had flu-like symptoms dramatically increased sick leave.

When tasks requiring a full team were pushed back, that in turn delayed the next trade due on site,and the flow-on effect in terms of costs could be considerable when cranes and scaffolding had to remain on site longer than anticipated.