Construction

$71 billion to future-proof Aotearoa

New Zealand’s construction industry is experiencing a slow down. Increases in inflation and interest rates have squeezed margins, and a decline in investor confidence has led to forward work becoming uncertain. The residential sector has been hit the worst, but almost every sector is feeling the pinch.  

Despite contracts getting cancelled, Aotearoa continues to need both residential and commercial buildings – as well as key infrastructure such as hospitals and roading. This is particularly pertinent in the regions worst hit by Cyclone Gabrielle.  

What are the measures Budget 2023 sets out to ensure the construction sector does not fall victim to declining economic conditions and enable us to continue to meet our country’s complex and ever-growing infrastructure and construction needs?  

Budget overview – policy highlights  

The Government has announced significant spending affecting New Zealand’s residential sector, with over $3 billion to fund 3,000 additional public housing places. New Zealand’s infrastructure deficit has also been addressed, with $6 billion to a new National Resilience Plan, focusing on both medium and long-term infrastructure investment. This will initially focus on the recovery from recent weather events. Transport has also been a big winner, with the Government announcing $369 million to restore New Zealand’s national rail service.  

Confirmed new policy areas 

Housing

• $3.1 billion capital and $465 million operating to fund 3,000 additional public housing places by 30 June 2025 in addition to the 14,050 funded since 2018 

Education 

• $77.1 million total operating ($17.1 million of which is new funding in Budget 2023) for the Apprenticeship Boost scheme to enable an estimated 30,000 apprentices to start or continue receiving support

Infrastructure 

• $71 billion across the next five years for new and existing infrastructure investments 

• $6 billion to a new National Resilience Plan to support medium and long-term infrastructure investment, initially focussing on building back better from recent weather events, as well as strategic planning of long-term infrastructure to address the infrastructure deficit  

• $369.2 million total operating to restore a resilient and reliable national rail service. This funding will enable KiwiRail to continue network services for all rail users and provide the platform for projected growth on rail. 

• $197 million total capital and $9.4 million total operating in the Auckland City Rail Link project, to address cost increases, including those due to COVID-19 

• $707 million total operating and $3.6 billion total capital to cover cost increases under the existing build programme funded through Budget 2020 

• $147 million to upgrade school buildings 

Cyclone Recovery 

• $804 million to fund infrastructure repair in affected regions including roads, rail and rebuilding homes and schools 

Business impacts and considerations  

Nick Innes-Jones, BDO Construction Sector Leader, says:  

“There has been a significant slow down in the construction sector, with some private sector projects getting cancelled. Ideally it would be the Government that fills the gap. While it is positive that the Government has today announced significant expenditure for the cyclone-affected regions, there remain many construction businesses in other areas of the country that need help and will not benefit from this.  

It will also be important for the Government to be a good client – particularly with its announcement of significant funding for new public housing schemes. The construction industry is in pain at the moment and if the Government tries to squeeze the lowest margin possible for public building projects then this will only add to the problems construction businesses are experiencing. Ruthless competition and tight margins are the last thing construction business leaders need in current conditions.  

Meanwhile, while there has been an increase in immigration to help fill the labour shortage, there remains a skills gap. While the increased funding for the Apprenticeship Boost scheme is welcome, and will help with lower-skilled positions, training for higher skilled construction jobs is just as important.”  

Quick tips & questions 

• Review your cash flow, and monitor gross margins and accounts monthly.  

• Stress test your monthly forecasts against any unforeseen events – particularly any potential reduction in work and 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.  

• Do not accept heightened contract risks and unreasonable clauses simply to win a project  

• Pre-plan and be prepared to down-size activity and staff numbers if there is insufficient profitable work for everyone  

More information and help available 

You can read more detail on Budget 2023 at the Government Budget website here.  

Building organisational resilience to shield your construction business from the impacts of increased inflation and reduced forward work 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, forward-thinking construction business. To talk about how any of today’s Budget announcements will affect your construction 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.  

View our BDO Construction Sector Report 2023 for a summary of the key challenges facing the construction sector, as well as practical advice for how to alleviate them. Our BDO Wellbeing & Business Performance Index April 2023 results also has a sector report on construction with tailored tips and advice.