Trench warfare in construction
Date: 25 August 2017
By John Beveridge,
If you're wondering how it is possible NZ's biggest building company is struggling to make ends meet in the middle of a building boom, you are not alone.
It seems incredible that, at the peak of the biggest and most sustained building boom, our largest publicly-listed building companies are reporting big losses on projects.
If this is what's happening at the top of the food chain you can be sure there are similar problems everywhere. The construction industry is at war with itself over scarce talent and skills. The incentive to use cheap substandard materials is a rising temptation.
Following on from Fletcher's shock and awe losses, a retirement village builder reported construction industry woes had cost it 5 to 10 per cent on projects. But they have advised shareholders not to be concerned about shrinking margins as they would be passing those costs on to buyers of their product. Lucky them being able to shunt the problem to elderly retirees.
Why is our industry suffering so badly in the face of unprecedented demand?
Largely, it is because the industry is still using techniques and materials almost unchanged in the last 50 years. According to a global study by the World Economic Forum, what took three workers to build back in the 1960s now takes five. Globally, construction has been caught in a time warp.
The industry has clearly failed to embrace change and diversity. There is no burning platform like say 40 years ago, when the UK cast us off to go into the then EEC and NZ farmers were forced to adopt new technology and productivity gains to survive.
The building boom-and-bust cycle creates certain predictable outcomes. Until now most have just waited for the tide to turn to recoup losses rather than make fresh investment and innovating. In the case of our largest building products company it is hard not to reach the conclusion that they have been asleep at the wheel when it comes to leading innovation to drive productivity best practice.
In the absence of investment in skills during the bust, the answer to the current shortage of skills has been to stick up the price. When prices are based on a margin on cost or an hourly rate, why do it faster? Use as much material as you need without concern for waste and you will be rewarded. Unless of course the contractor has fixed the price to win a job and can't control those costs.
In a boom everyone wants it tomorrow but tells you today so it turns up on time. This hoarding of time creates bottlenecks and gross inefficiency. The latest cause of a 5 per cent drop in activity is Auckland's wet winter because we don't build much in a controlled factory environment. We tell ourselves it is not viable in such a sub-scale market. Fortunately there are innovators like Box Living prepared to go against the tide of opinion.
Head contractors have been conditioned to shaft the subcontractor on price, retentions and payments. Some large contractors are just project managing subbies with very few trade employees of their own. It's a male dominated adversarial world with the subbies providing easy targets so as to make a buck, and the pressure is always on to cut corners and reduce quality. Collaboration is rare.
I am a part owner in a successful window fabrication business. While here in NZ it is a stressful time, we have won a multimillion-dollar export order to Central America. It's a relief to not have to deliver our products through Auckland's congested roads and deal with stressed site foremen.
Our client is paying us up front, loves our quality and design and is prepared to pay a fair price. We want to please so we win more of this work. We can plan our factory around the schedule we agreed and productivity is through the roof. It is a weird world where Central America is a better market than fishing in our local market.
In other industries and markets there are inspiring examples of thinking outside the square. Sick of traffic in LA, Elon Musk is going to get into tunnelling in his latest project, Hyperloop, to make tunnels cheaper than roads.
In Dubai they are looking to 3D print a building. In Britain all government buildings must use BIM technology where buildings will use artificial intelligence to improve performance. In China they are factory building skyscrapers in weeks.
In NZ the government is the largest construction customer. They need to mandate the use of some of these new technologies to attract fresh talent and entrepreneurs and drive change. Construction employs 250,000 workers and accounts for 6.25 per cent of our GDP. If productivity lifted 20 per cent it would improve affordability and the returns of NZ Inc as well as weary shareholders.
- John Beveridge is a former chief executive of Placemakers and now a business owner, director and advisor.