$61.9 billion announced for infrastructure and $37 million to transform the construction sector
The construction sector has been the stand out performer in the wake of the COVID-19 pandemic, and most businesses currently have more work than they can cope with. Uncertainty, however, is creeping in – supply chain disruption and lack of skilled trade specialists are causing chronic materials shortages and significant delays on projects, while building costs are increasing significantly. Business risk for construction companies is increasing – and yet to be the healthy, happy nation that meets the goals set out in the Government’s wellbeing framework, we need more quality housing and infrastructure.
What are the measures Budget 2022 sets out to enable this and how will they affect businesses in the construction sector?
Budget overview – policy highlights
The Government has today announced a significant infrastructure fund, with $61.9 billion forecast to be spent on infrastructure over the next five years. This includes a significant amount of health infrastructure to help New Zealand meet its health goals. There have also been wins for affordable housing, with $1.8 billion announced to improve housing outcomes, including $1 billion to support the delivery of public and transitional housing. The Kāinga Ora loan cap has been increased significantly, the house price caps for First Home Loans has been scrapped entirely and the house price caps for First Home Grants has been increased in many parts of the country.
Confirmed new policy areas for business
$61.9 billion on infrastructure over the next five years, including:
$349 million of capital funding to replace and modernise our rail assets
$1.3 billion of capital funding for upgrading our health infrastructure to support current and future demand, including priority capital projects such as Whangārei Hospital and starting the redevelopment of Nelson Hospital
$385 million of capital and $50 million operating funding for building and refurbishing new classrooms
Further funding to progress the delivery of the Auckland Light Rail project
$1.8 billion to improve housing outcomes
$73 million to extend the Warmer Kiwi Homes programme until June 2024
$221 million of total operating funding for the Affordable Housing Fund (formerly the Residential Development Response Fund)
$1 billion of total operating funding to support the delivery of public and transitional housing, including $75 million of total operating funding for the Homelessness Action Plan and $355 million of total operating funding to reset and redesign the emergency housing system to deliver improved housing and wellbeing outcomes.
Kāinga Ora whenua loan cap increased from $200,000 to $500,000
Increasing house price caps for the first home grant and removing them entirely from the first home loan to provide 7,000 extra first home grants and 2,500 first home loans
In addition, a Construction Sector Accord Transformation Plan ($37 million total operating) has been announced, aimed at increasing the productivity, capability and resilience of our construction sector, while maintaining a culture that fosters innovation and values our construction workforce.
Business impacts and considerations
Nick Innes-Jones, BDO Construction Sector Specialist, says:
“New Zealand’s construction sector is desperately short of labour – the Government has set out some significant building projects today but it needs to be able to ensure it has the labour available to meet this demand. This means ensuring its immigration settings are allowing skilled labour into the country to enable these projects to be built. Otherwise the lack of materials and lack of people will cause significant delays to the projects announced today.
The $230 million trades training programme seeks to plug some of this skills gap. However the trades are not the only part of the sector that needs supporting. There are currently desperate shortages of quantity surveyors, estimators and other construction management roles.
I would have liked to see more of the Climate Acceleration Fund geared towards helping the construction sector do its bit for climate. We have seen clients eager to build more sustainably, however there has been little guidance from the Government on how to do this – and unfortunately, sustainability can often be the first thing that gets thrown out if it’s seen as too expensive. I’d have liked to see the Government subsidising sustainable builds and providing training to allow the construction sector to truly embrace sustainable building.”
James MacQueen, BDO Construction Sector Specialist, says:
“Put simply, there has been a loss of business confidence in the construction sector once work underway is completed – developers with new projects are not getting the pre-sales they had anticipated. We predict a slow-down in the housing sector shortly, driven by affordability and the increased risks arising from inflation, however the country still needs more houses. Kāinga Ora is part of the Construction Accord and is therefore required to be a supportive client – in an ideal world we’d like to see Kāinga Ora become a more supportive client and ensure the inflation risk is not forced into the construction sector when it commissions new builds.
I’d like to see contracts where Kāinga Ora takes the risks of increased costs instead of construction companies through the development of a contract arrangement that can help the industry as a whole. This can be done either through the cost plus margin approach, or an indexed input costs approach, that allow for increased costs. This would provide much better support to ensure the projects announced today get completed and initiatives can be successful.”
Quick tips & questions to help your construction business
Considerations for businesses in the construction sector:
Have you reviewed your contracts to ensure you’re not taking on any additional risk?
Do you have a comprehensive staff retention and attraction plan in place?
How easy is it for you to take a birds’ eye view of your business and review monthly accounts and project margins?
Have you stress tested your business against any unforeseen events?
More information & help available
You can read more detail on Budget 2022 at the Government Budget website here.
Building organisational resilience to shield your construction business from the impacts of spiralling costs and a shortage of available construction skills requires flexibility and careful planning. Our specialist BDO construction advisory team is here to help you manage and adapt to change to ensure that no matter what happens, you’re running a profitable and forward-thinking construction business. To talk about how any of today’s Budget announcements will affect your business, and for help with cash flow, forecasting, stress testing, contract review or simply to talk to someone and bounce ideas off, get in touch with your local BDO office today.