If there’s a shortage of tradies, why are they going out of business?

by Pattrick Smellie / 02 May, 2017
Photo/Simon Young

Photo/Simon Young

RelatedArticlesModule - Listener housing story

All this while the building boom goes on.

Victor Barikov learnt his building skills in Russia’s Far East, but in some ways he’s found it tougher in New Zealand. In Auckland, as Victor the Builder, he’s garnered an almost perfect score on the NoCowboys website that uses customer feedback to build a ratings track record for tradies.

“He is excellent!! He deserves to do well,” Kathryn wrote in a 2013 review, giving Victor a 100% rating for communication, quality of work, reliability and value. In 2015, Yanina also gave him 100% for his “absolutely superb work” installing laundry cabinets and doors.

At the small end of town, though, where margins can be wafer-thin and subcontractors give fixed prices to win contracts, it doesn’t take much to push a business underwater, and Barikov’s VB Construction was put into liquidation by Inland Revenue in February with a preferential claim of $177,525 for overdue PAYE, GST and other deductions. Claims from unsecured creditors to date amount to about $81,000 and creditor costs add another $4359 to the claims, the first liquidators’ report says.

Barikov told the liquidators that VB Construction failed because of delays in being paid for contracts. One of his last jobs, he says, was as a subcontractor on a six-month residential build that ended up taking 12 months because of design changes and delays with supply of materials such as windows that wiped out his profit. The liquidators are still doing their work, so it's hard to point the finger of blame, but Barikov’s story is very common.

In the 12 months to March 30, more than 221 companies put into liquidation were broadly in the building trade – drainlayers, builders, plasterers, painters, developers, scaffolding companies. That’s up from at least 173 a year earlier, based on Companies Office data.

Some were only ever set up for a single project, others bit off more than they could chew or ended up losing money on contract delays. Some were dodgy – the liquidators of one company couldn’t talk to the director “due to incarceration”.

Auckland-based builder subcontractor Jalon Homes, which was put into liquidation by Carter Holt Harvey, told the liquidators it became insolvent because of bad debts and an inability to get credit from suppliers. SVN Builders and Developers told its liquidator that it had negative cashflow and wasn’t able to pay its debts. As in the vast majority of such liquidations, Inland Revenue is a key creditor – getting behind on tax is a common element in failures of small and medium-sized enterprises.

“A lot of businesses in the construction sector are small and not sophisticated,” says Lara Bennett, executive director of the Auckland restructuring team at major accounting firm PwC. “They might put in a guaranteed price, so they are locked in and confirmed they will do it.

“There’s a lot of pressure on pricing. Even though there is high demand, there is a lot of pressure from above.” The industry has “quite a long supply chain” and is dominated by small, unsophisticated companies.

Although it is a boom time in terms of work in Auckland, that doesn’t necessarily lead to higher margins and it can encourage smaller businesses to take on too much or tackle jobs that are outside their normal scope of work. “That happens reasonably frequently, especially in times of high demand,” Bennett says.

In February, Barikov set up a new building company, Avicon. “Mostly I’m optimistic. I trust I will survive,” he says.

At the big end of town, Fletcher Building will also survive, even though New Zealand’s biggest building products and construction group shocked professional investors last month by cutting its full-year earnings forecast by $110 million.

The cause? Fixed-price contracts on two big projects where the budgeting failed to anticipate escalating build costs caused by the construction boom.

Fletcher chief executive Mark Adamson says jobs with the largest contract started with “certain engineering issues that had not been resolved”, which “caused the initial delay”, and that was “exacerbated” by changes to the design brief for the “unique” building.

Staying on programme when managing a complex project is critical because delays can have “almost an exponential multiplier effect” in terms of added cost, he told analysts on a conference call to explain the earnings downgrade. That hurts, especially when inflation in the building industry is running at four times the rate of the consumers price index.

Construction contracts can be signed two years before any subbies are needed to do tiling or painting on a building site, and in the meantime, labour costs or a skills shortage may have become an issue.

NZ Institute of Quantity Surveyors president Jeremy Shearer says a company of Fletcher’s size has a big enough balance sheet to cope with losses on contracts. And Fletcher also has huge resources to ensure it has the appropriate mechanisms to handle risk and is one of a relatively small number of large-scale builders in New Zealand.

“Small subbies end up taking on risks they don’t know they’re taking on or carrying risk inappropriately,” Shearer says. When they get behind on a project and try to recover lost time, “it’s exponential. The costs escalate dramatically.”

John Dakin, chief executive of industrial and commercial property investor Goodman Property Trust, says the cost per square metre to build the average warehouse in Auckland is about 50% more today than it was five years ago.

Construction costs have been rising 8% a year for the past five years, while annual inflation hasn’t been more than 2.2%.

Dakin says one of the reasons is a shortage of subcontractors able to do major projects “because they are so flat out … At the moment, there’s a lot of price escalation around labour.”

So acute is the shortage that the Building and Construction Industry Training Organisation (BCITO) has launched a campaign to attract more young people to the sector through apprenticeships.

New Zealand “is in the midst of a skills shortage”, says BCITO chief executive Warwick Quinn. “Thousands more apprentices are needed to fill the demand in the building sector”, which is forecast to account for one in five new jobs created between 2016 and 2019, he said, citing Ministry of Business, Innovation and Employment forecasts.

Malcolm Hollis, a Christchurch-based partner at PwC, says there has been an increase in building companies failing, which he says partly reflects the city’s rebuild cycle following the earthquakes. New suburbs that arose on the outskirts of the city are now well populated with housing.

“Court lists I’ve seen – half the companies on the list, if not more, are building companies or building-related,” Hollis says. “A lot of people entered the Christchurch building sector; we’re seeing a flushing-out of some of the smaller, weaker firms that have not been able to run an efficient business. We’re seeing a few rogues.”

Tighter credit is also a factor. As the major banks wind back lending, starting with property development because it’s riskier than lending on existing homes, the building industry can’t rely on the finance companies that financed the last boom.

“We’re definitely seeing a tightening of credit in the sector from the main banks and a lack of funding from second-tier funders,” Hollis says. “Developers and builders are finding it harder to get finance. There’s now very little in the way of institutional second-tier lending.”

Christchurch faces a different set of issues from Auckland, where subbies can’t keep up. Hollis says the supply-demand balance in Christchurch tipped more than a year ago. “The outer areas west and south have been filling up. In 2013, there were 14 subdivisions. That’s slowed down. Firms are closing down and focusing on Auckland.”

This article was first published in the April 22, 2017 issue of the New Zealand Listener.

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