Economic uncertainty: What can construction businesses do to mitigate the impacts?



Last week, BDO Constructor Sector Specialist James MacQueen led an insightful webinar with Jarrod Kerr, Chief Economist, Kiwibank and Nick Innes Jones, Construction Sector Specialist, BDO, on the ever-changing economic conditions New Zealand faces and what business owners can do to manage the impacts. 

Borders reopening to provide boost to NZ economy

Jarrod Kerr began by giving a brief overview of current economic conditions, highlighting continued issues with the global supply chain and increasing commodity prices, which are dampening growth and business confidence. However the borders reopening has been welcome and this will help the economy.  

Other good news can be found in New Zealand’s terms of trade, which is at a record level. Export prices are very high relative to import prices - a huge income boost to rural New Zealand.  

Looking to the future, interest rates will continue to rise as the Central Bank responds to high inflation and the tight labour market. 

Construction sector the stand out post-pandemic performer - but storm clouds on the horizon

Next Nick Innes Jones discussed the market and changes construction companies can make to their business.  

The construction sector has been the stand out post-pandemic performer – consents are up and most businesses have more work than they can handle. However there is also a lot of uncertainty, with difficulties in supply of materials, increasing costs and a shortage of trade specialists all causing disruption and waiting periods for jobs to increase. So while the sector is currently booming, there are some storm clouds on the horizon, with an expected dampening of demand among developers and in the residential market.  

Nick then gave a number of tips for businesses to mitigate these risks: 

  • Focus on your cash flow – cash continues to be king! It’s a good idea to address your overheads, slow down capital expenditure and review job margins.  

  • Stress test – have a monthly forecast for the next financial year and stress test this against any unforeseen events to show how your business would perform. 

  • Monitor your gross margin on projects on a monthly basis – this will give you a better view of expected income. 

  • Review your monthly accounts – this will enable you to get a much better picture of how the business is performing. You should also benchmark against your peers to see where you’re at in relation to others.  

  • Review your contracts – these are essential to get right. Ensure you have cost escalation causes, avoid fixed-price contracts and introduce allowances to cover rising building costs.  

  • Consider what you can do to retain your staff – if you look after your staff well they generally are much less likely to move on. Shares and bonus schemes will help hold employees in the business.  

  • For subcontractors - review and collect outstanding retentions 

  • For head contractors - maintain the spread of subcontractors and review the finances where possible  

  • Take a bird's-eye view of your business – who are your best clients and staff? Engage in succession planning to keep your best talent and ensure you are regularly communicating with your clients about projects. 

Organisations are more resilient when they have a leadership and culture that actively plans and allows for constant change. Likewise experienced advisers that understand your sector will help you not only navigate through periods of uncertainty but also thrive. If you would like help with cash flow, forecasting, stress testing, contract review or simply need someone to bounce ideas off, get in touch with your local BDO office today.