The New Zealand construction sector is entering unknown territory as the boom which started with the Christchurch recovery rolls on and threatens to gain momentum, Brian Clayton and Hamish Bolland believe.
The latest National Construction Pipeline report is projecting a smoother, longer peak than previously assumed with current activity levels, unprecedented by value, being sustained through the next three years. Normally in these circumstances governments and the Reserve Bank would lean against the curve, but these are not normal times.
Instead the government is intent on increasing housing supply while strong inward migration, the Canterbury earthquakes, the evolution of the ‘super-city’ and a legacy of systemic under-expenditure are propelling large volumes of infrastructure investment. Even genteel Wellington has eight major projects signed off and ready to go.
In an article for Infrastructure magazine in 2013, we said:
“Contractors are hungry at present as they have geared up for the Christchurch rebuild and that work is not yet flowing. Soon, however, these dynamics will be reversed and they will be inundated with work, which will shift the bargaining power of the parties”.
That effect is now very definitely with us and looks like being with us for some time to come. The evidence is everywhere of a market already stretched to capacity:
- Jobs are being turned away
- Skills shortages are endemic with construction-related occupations dominating Immigration New Zealand’s Immediate Skill Shortage List
- Increasingly materials are having to be sourced overseas
- Auckland City Council and other councils in high population growth areas are struggling to get enough staff to process consents, inspect sites and sign off buildings.
Players in a market this hot have two choices – they can either stand the heat, or they can redesign the kitchen. Most are doing a bit of both. Three broad responses are in play: advance planning to circumvent potential supply bottlenecks, innovative contracting and procurement techniques and joint ventures as collaborators with offshore partners.
Pre-purchasing
Nick Smith commented recently that builders were telling him a truckload of concrete which used to be available at 24 hours’ notice now needed to be ordered three to four weeks in advance. This chimes with our experience.
There is a definite trend toward procuring long lead items early and requiring the main contractor to use that supplier, even if they have never worked with them before and have established relationships with other suppliers.
Catch them when you can contracting
Early Contractor Involvement or ECI has become a popular contracting option in post-earthquake Christchurch so there is now significant familiarity with this technique, and people are beginning to experiment with variations on it.
It suits a highly competitive contracting market because, as the name suggests, it brings the contractors in at the design stage and seeks to embed them for the life of the contract.
One variation – used on the Christchurch Metro Sports Facility – was to appoint two ECI contractors rather than just one as a way of maintaining price contestability. Obviously this involves an additional upfront cost, but the owner clearly considered that to be justified for the protection it offered against price creep or becoming captured by one contractor.
Another variation – used for the new outpatients building at Christchurch Hospital – was a two-stage construction contract. Following a competitive tender process, a contractor is awarded Stage One of the works and may be awarded the larger second stage should its price for Stage Two be accepted. That price for Stage Two, which it must work up during Stage One, will typically include a locked in P&G sum and a margin percentage.
This achieves the objective of securing a contractor early and cuts out the need for a separate ECI contract.
Construction contracts also tend to lock in key personnel. Some will go one step further and require that key personnel be bonded to the project so that if they leave before the completion of their role the contractor is liable to make a payment to the owner.
JVs
The New Zealand building industry is dominated by very small enterprises – the boss, the boy, the ute and the dog. Since the collapse into insolvency of Mainzeal in 2013, many consider that we now have only two top-tier construction companies followed by a larger number on the rung below.
However, local firms were never going to be able to bulk up sufficiently to handle the wall of work now available, and excess capacity created by flattening demand elsewhere, particularly in Australia and China, made it inevitable that there would be high overseas engagement – often as head contractor but almost always in consortia, JVs or other forms of tie-up with New Zealand interests.
Australian contractors have featured prominently: for instance, CPB Contractors (formerly Leightons) on the Christchurch Bus Interchange with local firm Southbase and on the acute services unit at Christchurch Hospital, and Cockram with Leighs to redevelop Burwood Hospital.
There is significant Chinese interest in Auckland – notably from China Construction New Zealand Ltd, a subsidiary of the megalithic CCEED (China Construction Eighth Engineering Division). It is in JV with Hawkins for the St James Theatre and Park Hyatt projects and is also looking to tender for a 52-storey residential tower on Customs St in the CBD.
We expect all of these trends to continue over the next few years and to fundamentally change the New Zealand construction industry in ways which will endure when the current boom has run its course.
Brian Clayton is a partner at Chapman Tripp and Hamish Bolland is a senior associate. Both have significant international experience and both specialise in construction law and major projects.
