The majority of construction companies have built strong profits over the past few years, and many have good levels of cash in reserve and an excellent level of forward work. That said, inflation, labour shortages and material shortages are all impacting the health of the sector, with subcontractors particularly at risk.
Gaps between projects causing cash flow problems
Subcontractors tend to bear the initial financial and operational risk of a project, and many are struggling with productivity at the moment due to the significant delays caused by covid and supply chain challenges. “When construction businesses have staff away they cannot reach full productivity on site. In addition, material delays mean we are seeing significant gaps during and between projects, which is having a negative impact on cash flow,” explains James MacQueen, BDO Construction Sector Specialist.
The financial collapse of any subcontractors will have a direct impact on builders and head contractors as it will further slow down, or even stop, projects, which will in turn have its own ripple effect.
Mitigating construction risk through workflow planning and due diligence
There are several steps New Zealand construction businesses can take to shield their organisation from this uncertainty:
Plan workflow carefully to avoid any gaps between projects, taking into account current material shortages and likely delays.
Do your due diligence when accepting projects – if a client is unlikely to be able to pay to the last bill, don’t accept them.
Avoid fixed price contracts, especially if the price is fixed at current prices.
Start preparing to right size (also known as downsizing). Organisations need to consider what overheads they can trim now to operate at half the level they are working at present.
That said, it’s important to still retain your skilled staff and continue with their training (the Government’s Apprenticeship Boost scheme can help you do this), so that you don’t perpetuate the skills shortage which is having a significant contribution to current conditions.
“In the past few years employees have been prone to move jobs for an ‘extra dollar an hour’”, says James. “But in the current uncertain economic environment, I encourage them to hold on to their positions especially where they are in a mature, resilient business which will provide better security for employees; and for employers, providing apprenticeships and training will help sweeten the deal for your employees.”
“We’d also like to see various actions from Government to help shield the construction industry from cyclical downturns. Government must ensure there is a transparent pipeline of profitable forward work across its agencies to give the industry confidence to invest in people and innovation”.
Listen to James’ interview with RNZ on the current state of the construction sector here.
If you’d like to talk to a trusted adviser that can help you navigate New Zealand’s increasingly complex construction industry challenges, BDO’s specialist construction advisory team can help. Reach out to your local office today.