2019 has got off to a positive start, with an exciting mix of projects coming through the doors at White Associates.

The market is still showing its appetite to proceed with projects that have strong fundamentals, and we’re seeing a high concentration of residential projects within this number.

As you’d have seen from all the cranes around the Auckland in particular, the activity and momentum of last year is continuing, although we expect that residential activity may well ease in the final quarter of this year, due to where we are in the market cycle.

Challenges remain

One thing we know for sure is that the myriad of challenges that have plagued the construction sector over the last few years remains. Cost escalation, labour constraints, challenges with construction personnel capability and subcontractor capacity, design and consenting delays are all leading to increased development durations and costs. As the market is still reasonably heated, with strong demands on all resources with the larger projects and especially in Auckland, this in turn means that the challenges that affect the funding of projects also remain.

Difficulties in obtaining project pre-sales, project feasibilities, and the continued potential for construction company failures are just some of the landmines that lurk, ready to explode in the face of the unprepared.

Borrowers and funders will need to come up with innovative ways to fund projects with strong fundamentals, in order to enable them to proceed without the current level of presales required.

Limiting potential risk exposure

High land values and construction pricing still exist, creating project feasibility conundrums. That said, we are seeing some developers exit land holdings at discounted rates in selected areas due to projects not stacking up. We expect this trend to continue this year as the cycle continues.

In turn, these factors are also leading to housing companies in Auckland pulling back on the level of spec builds they undertake, in order to limit their potential risk exposure and cashflow restraints by having too much stock on the market.

Housing shortage – or social housing shortage?

We note with interest the many mentions in the media of a housing shortage in New Zealand. It occurs to us that in reality what we are seeing is in fact a social housing shortage, and the supply of housing above this level has stock available. This is partly behind the reasons why purchasers are not under as much pressure to buy. They have time for more in-depth and time-consuming due diligence, and are generally moving away from buying off the plans in case the market falls further.

Need to innovate

So, as we look ahead, what we’re seeing is that borrowers and funders will need to come up with innovative ways to approach the funding of projects with strong fundamentals, in order to enable them to proceed without the current level of pre-sales required.

This is where quantity surveyors’ continued level of scrutiny during the pre-condition report and drawdown phase will help to read the signs if a contractor may be heading for trouble, and our increased scrutiny on contractor selection and due diligence will help project funders and deliverers both have more confidence.

From July this year, we are planning to run a seminar for project finance teams on the state of the market to give funders a heads-up on trends in commercial/residential construction space so you can gain insights as to where we see the market moving forward. Please contact us on (09) 362 0624 or email dbayer@whiteassociates.co.nz if you’d like us to come to your office to run a seminar.

By Jesse-Paul Conradie

It is well known that New Zealand’s construction sector is buoyant and one of the top contributors to its GDP. That said, it is also no secret that the industry’s performance is currently strained by growing demand, lack of capacity across the supply chain and pricing and margin pressures.

The current environment is not sustainable. Invariably, over time, as the saying goes, ‘something’s gotta give’. And we’ve all seen it happen recently. Much to the industry’s dismay, several industry players have succumbed as a result of a number of contributing factors. When companies are stretched, their ability and capacity to absorb the adverse effects of risks withers.

As a consequence, it is no surprise that an adversarial culture burgeons, and disputes proliferate. And we have all seen disputes have devastating consequences, even for established companies – most recently shown by Arrow International placing themselves in voluntary administration after being on the losing end of a $4.2m contractual dispute.

Some common risks and causes of disputes include, but are not limited to:

• Poor risk allocation
• Incomplete design information and variations
• Unforeseen ground conditions
• Discrepancies and/or errors and omissions in contract documents
• Contracting parties failing to understand and/or comply with their respective contractual obligations
• Unsubstantiated or inadequately drafted claims

No one disagrees with the fact that disputes frequently cause damage to business relationships and reputations. Not only can they be expensive and protracted, but the implications on finances and resources can be immense when they need to be resolved by complex and cumbersome processes.

The situation begs for a paradigm shift

The focus should rather be directed into two areas. Firstly, towards conflict avoidance. Then, if disputes do arise, how early interventions can assist in effectively mitigating the adverse effects of dispute resolution.

Early interventions can assist in effectively mitigating the adverse effects of dispute resolution.

Active dispute avoidance initiatives could in essence be condensed into the following three core risk management principles:

1. Engaging and involving all relevant stakeholders early including the designers, contractors, key suppliers/subcontractors, client, end users and funders during the initial phases of the project to ensure that expectations and deliverables are properly coordinated.
2. Promoting a collaborative approach by involving relevant project stakeholders in processes of active risk identification, risk response planning and risk control and monitoring.
3. Realistic and fair allocation of risks to the party best suited to manage/absorb the risk.

As with any relationship, open communication is key. At all project levels, the proactive management of risk allocation and behavioural attitudes is vital in order to address disagreements at project inception.

Every project is unique, and so are the associated risks. Incorrect allocation of risk can lead to inefficiency, delays, excessive costs and disputes. It is therefore imperative for parties to remain engaged in active risk management throughout the different phases of a project.

Once disagreements occur, the key is to identify the problems and quickly take appropriate action. Every reasonable effort should be afforded to settle disagreements expeditiously and to avoid arbitration/litigation.

In our view, more can be done to diverge from the adversarial approach which causes a significant financial drain on resources and damages relationships.

Top Tips for dispute avoidance in construction projects:
In order to promote a collaborative dispute avoidance culture, and to resolve disagreements before they become disputes, parties could for instance feasibly:

• Develop and include a process within their contract to resolve issues at project level.
• Ensure parties are afforded equal opportunity to present their case.
• As a precursor to a more formal procedure, escalate the disagreement to senior staff of the respective organisation with the aim of settling the matter at hand.
• Employ the services of suitable facilitators, conciliators, and dispute avoidance boards to aid in resolving the issues.

Given the current strained market conditions, with people looking to enforce contracts in ways that will lead to more disputes, a concerted effort is required to reduce the incidence of formal disputes in order to ensure the sustainability of our industry.

Dispute avoidance is all about adding value. So let’s endeavour to change the current mindset and culture.

Written by Justin Maritz

As we approach Christmas, it is not only household budgets that are feeling the strain. The development and construction sectors have been under pressure for a while, and one of the key concerns expressed across both sectors is whether projects are stacking up financially: do they have the financial underpinnings to get to the finish line?

From our viewpoint at White Associates, the single biggest thing you can do to stop your project from grinding to an expensive halt along the way is to undertake proper, detailed feasibility of the concept at the earliest possible stage. If your feasibility is set up well, you will be able to make more informed decisions early on – and particularly key decisions about design deliverability.

More and more projects are coming to us with unrealistic budgets for proposed developments, which can be quite worrying.  We are seeing more proposed developments coming to us that already have Resource Consent with an unrealistic construction cost expectation.

Carrying out a robust feasibility estimate/masterplan is the best early decision-making tool you can have in your kit, as it helps you to answer the all-important question: ‘is our project the right one for this site?’ Essentially, this activity requires us to focus on the worst case, not the best case. We’re realistic, which means that if that early cost is too high, we can help you work to come up with good options and solutions.

The more detail you have, the more detailed the outcome will be. If you understand your feasibility, you’ll know if your project stacks up, from the start. There is nothing worse than setting a designer off blind. It’s much better to go to a designer with a realistic budget in place, then everything will work together better. You can then work through the process methodically in a planned and organised fashion, in a reasonable amount of time – and get a much better result in the end.

What does this involve? When you’re doing a feasibility study, you need to get as informed as you can early on to understand all potential issues on site such as geotech, the product you intend to sell, what specs you’re going for, and to get informed early of potential issues along the way.

Once a realistic budget feasibility is set, it should be managed accordingly to ensure risk allocations are managed well between all stakeholders to the benefit of the project and budget. It is prudent at this stage to make allowances for risk that may or may not occur in order to have a realistic level of headroom in your budget for unforeseen costs.

Good feasibility work will also help you to understand the outcome equation better. As highly experienced cost planners – across commercial, residential, prisons and educational sectors in particular – we use our experience to inform detailed outcomes. We know that our work is one side of the coin, but if you can see more clearly what a project is going to cost, you will be able to answer the all-important questions.

Commercial developers want to ask: “Am I certain that I can get my expected return?” and the public sector asks: “Am I certain that I can get value for money from this project?”

We know that experienced developers understand site constraints and project deliverables and go in with eyes open, get a feasibility to be realistic, understand then how the return and margin works, so they can then make good decisions. We work with developers to do a high-level cost estimate early on, so they can then make a decision as to whether to proceed on current path or not, as they know what expected return should be.

This approach then allows room to manoeuvre. Feasibility gives your project a range, bandwidth: an estimate of costs at $x, but realistically this can be plus or minus 10%. It’s the range you need to consider.

If you do this early enough, you can understand the margin you can work to achieve, and also understand for example if there is potential for an infrastructure upgrade. Then you can head down a targeted process, making informed decisions at each stage – not just land somewhere and go ‘oh’… We say, take the surprise factor out of the process.

So, if you’re planning to make a Christmas cake, we say make a Christmas cake: don’t make a mince pie. When you open your presents on Christmas Day, be happy because you got what you wanted.

By Graham White

There’s a lot of talk in the market at the moment about procurement, forms of contract and unfair sharing of risks causing major problems on construction projects for companies.

In my view though, this has never been about the form of procurement, or the contract. It’s about having the right teams of people in place consistently over time. When you get a great team together – involving the client, project manager, design consultants, quantity surveyor and the contractor – you’ll have a great job: if you have them in place, the right people generate the right outcome.

What happens in our industry is that a project is successful because of the great team. However, what then happens is that on the next project the client goes to market for every part of the job – consultants, project manager, contractor, QS – and ends up with a different team. And then they wonder why this next job isn’t so successful.

It’s obvious: if the team changes, the balance is disturbed, so the outcome changes. If we think about great teams, we tend to think of the All Blacks in this country. If you transpose our world into theirs, it would be like saying, ‘they played one game brilliantly, so for the next game we’ll find someone cheaper than Beauden Barrett,’ save a bit of cash, and then wonder why we lose the game.

Great teams of the world, like the ABs, have a consistency about them. They don’t chop and change unless there are significant performance issues. Retaining the right people is therefore the key to building great teams. You need the right people, with the right cultural fit, across all key roles, otherwise the team loses the flow and energy that it had.

The risk is that in going through a number of people you can lose the cultural fit that made the relationship work in the first place. If you engaged a contractor with a can-do cultural fit but the people changed and now it has become contractual environment, what was the cause of the problem?

Communication – priorities, discussion, no secrets – that’s the key. Disclosure, openness and honesty, are so important. If there’s an issue, particularly relating to changing key team members, getting it onto the table is critical. Being proactive and sharing problems is the key to building trust in teams.

The industry is under huge pressure for resources and time. In this intense time, and in this incredibly complex industry, it’s all the more reason to work consistently with people you trust, because true success is built on consistent, long-term partnerships.

It’s never been more important than now.

Love caffeine, hate waste? We do. So we’re doing something about it, hooking up with stylish re-usable coffee cups company KeepCup, to cut waste and encourage the use of re-usable cups!

KeepCup is kick-starting ‘the demise of the disposable’, which we think is admirable. The company has started a behavioural change that is spreading across the world: people purchase a KeepCup re-use it instead of throwing it away, because they love the way they look and feel.

Now in 65 countries around the world, over 8 million KeepCups have been sold, diverting billions of disposable cups from landfill.

Our KeepCups initiative at White Associates was prompted by Elliot Smith and our CSR team. Elliott says:

“When I was given a KeepCup it got me thinking about how we could use them to minimise White Associates’ environmental impact by reducing the amount of waste going to landfill.”

“It’s an easy way to make a positive impact on the environment. After all, KeepCups are great-looking, easy to take with you when you grab a coffee, and I think my coffee tastes better in one!”

The pressure is on for construction companies large and small right now – and for their sub-contractors and suppliers.

Business news channels are alive with stories of finance and retention payments-related cataclysms, such as the Matrix Homes receivership and the circa $30 million owed to Orange H Group creditors, to name but two.

In turn, this will no doubt cause a cash flow crisis – or worse – for supply chains as companies from the biggest downwards struggle.

But is this pain avoidable? If you know that your retentions are on trust, then yes. Otherwise, disaster could be just around the corner…

In an article we published in November 2016 on the Construction Contracts Amendment Act 2015 (CCA 2015) and the new retentions regime, we expressed hope that the then-new requirement for companies that deduct retentions to hold the monies on trust in the form of cash or other liquid assets,  readily converted into cash and properly accounted for, could be the catalyst for an evolution of traditional contract agreements.

We applauded the Government for taking strong steps to make the Act law and put a new regime in place so retentions would be held in trust to protect contractors and subcontractors.

However, since then so much – and yet, not enough – has changed.

Leading accountancy firm BDO recently published its BDO Construction Survey Report, based on an April 2018 survey of main contractors and subcontractors.

The survey results contained a truly eye-opening statistic:

74% of respondents have not asked their customers if their retentions are being held in trust.

Acknowledging that the retentions regime “has had a fundamental and permanent impact on cash resources”, the BDO survey, which was led by partner James McQueen, has spotted that although companies of all sizes have the ability to inspect the trust records at any reasonable time, the vast majority of them have chosen not to exercise it.

Further, for those who did ask to inspect, BDO describes the results as “equally concerning”, revealing that “36% of those who asked to inspect retentions records found at least one customer who was not holding funds in trust or covered by insurance”.
In short, breaking the law.

White Associates’ Director Darin Bayer asks if this is because there is a general assumption out there that ‘everything is ok now’ after the Act came into force – and that Mainzeal couldn’t happen again?

“Have smaller companies, dependent on the goodwill of (and income provided by) their bigger clients, been too afraid to ask to inspect their retentions? Surprisingly, no. BDO discovered that it is not so much about small fish versus big fish. Their survey revealed that 90% of large construction companies and 70% of large subcontractors have failed to ask.”

Why are companies not protecting themselves by checking?

There are two clear problems, says Bayer.

“Firstly, retentions have to be in the form of cash or other liquid assets, and yet not used as working capital. There may be good intentions by companies to manage the liquid assets. However, without strong accounting records and practices in place it could be all-too easy to have insufficient monies available to cover all retentions obligation”

“And secondly, the CCA 2015 Act itself puts the onus on the party who has retention monies withheld to check if they are being held in trust. Further, it’s also worth noting that company directors can be liable in this area for not complying with the CCA 2015 Acts requirements when holding retention monies.”

All it takes is to ask for confirmation that retentions are being held in trust

Bayer says that the issue when it comes to a company liquidation for example, is that the liquidator will collect what funds it can. However, if the funds are clearly in trust for the purpose of retentions, they will be protected.

“If companies with retentions withheld from them want to protect themselves, the first step has to be that they need to police their own retentions better, using the powers that exist under the CCA 2015 Act. They need to check that all retentions are being held in accordance with the Acts requirements”

“If it is the case that it is ‘the Kiwi way’ of not wanting to pry into other’s affairs, that is getting in the way here, Directors have to get past that to protect themselves, their companies, employees  and families.”

“To protect themselves and their companies, directors need to ensure monies have been set aside. If the monies are co-mingled or part of working capital, it may be difficult to prove they are held in trust. The best way is to separate them out and ensure they are properly accounted for.”

Bayer says that it should be a simple part of every contract establishment process for the party holding retention monies to set up a retentions account. Then, part of the ongoing contract management process should involve the accounts department contacting the main contractor/client to confirm the retentions are being held in trust, and to check the details of how much is in the account. And another option is to obtain a retentions bond from a reputable surety.

Will it take another significant failure before the industry uses the legislation?

In light of recent events, there may be calls in some quarters for the Government to tighten the current legislation. However, Darin says this course of action will add further compliance costs to a market that already has inflated construction costs in comparison with the rest of the world.

“First we need to ask why the construction industry is not using the provisions of the current legislation to increase the level of protection against the potential loss of retentions monies,” he says.

“If companies aren’t bothering to check now, when legislation is already in place, why would they do so with further legislation? The penalties for non-compliance are significant for company directors withholding retentions – and thus not complying with the CCA Act 2015 – but it appears this message has not got through”

“Sadly though, in our view it will only happen after another major failure – perhaps an instance when sub-contractors don’t get paid and the question is asked ‘how has this happened again?”

Is it time to use the current Construction Contracts Amendments Act 2015 retentions provisions better?