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?

At 177 High Street in Christchurch’s city centre is a magnificent new version of what was once described as one of the most architecturally beautiful buildings in the city.

The historic Billens Building, built in 1906 and originally called England Bros House, was destroyed by arson in 2012 leaving the building, along with the hearts of locals, in ruins.

It had been described as a masterpiece and was a cherished part of the city centre. For that reason, Sean Stockman of the Stockman Group Limited, took it upon himself to restore the old girl to her former glory. Construction was completed earlier this year and the end result has seen Sean and the team that pulled it all together being heralded as heroes by the local community.

White Associates provided bank funding on the development and Director Darin Bayer says the end-result has really struck a chord with locals, and for good reason.

“We have a huge admiration for the Stockman Group’s dedication to celebrating the city’s historic roots. Through their meticulous attention to detail they’ve managed to create a spectacular new, art-deco building that really has that heritage feel.”

“I’ve been involved in construction for 25 years and I’ve never seen a better finish on a commercial building. I was blown away. The contractors, Canform Structures, have done an amazing job.”

“We’re really proud at White Associates to have been involved in such a well-managed and executed project.”

The new Billens Building will have four boutique tenants on the high street while the upper floors will have multiple offices catering for one to five people along with a number of meeting rooms.

Be sure to pay it a visit next time you’re in the area!

Fletcher Building’s woes are well documented but what effects are they going to have on the rest of the construction industry? Here’s our take on how the ripples will be felt for some time to come…

When this country’s biggest construction company announced in February it would stop bidding for any big, new commercial projects, it represented a seismic shift in the landscape of the industry. It followed the last two sets of astonishing financial losses which while surprising to some, came as no surprise to others. We, like others, warned of the perfect storm brewing last year that was eventually going to take down a major player.

There’s a lot of uncertainty in the market at the moment. Now that we know Fletchers won’t be bidding for any new work, here are the big questions surrounding the industry.

• Who’s going to fill the void?

When large projects come up, which contractors will bid for them? The questions around capacity are intriguing. Fletchers was long seen by many as the default option for big projects and now that’s gone. Will it be the existing top-tier ones or will we see a mid-tier contractor expand and move up the ranks?  

We’re already seeing that overseas contractors are finding New Zealand appealing. With Australian and Chinese contractors already operating here, we will see them expand and potentially have more offshore players setting up camp here. It will be interesting to see what impact that has on the culture of the industry and the level of responsibility foreign contractors are willing to accept.

• Will contracts come under increased scrutiny?

In recent weeks we imagine just about every contractor in the country will have been reviewing the contracts they’ve committed to – trying to unearth any cost liabilities they may have initially overlooked. With all the amazing people they had and the wealth of resources available to them, if Fletchers could get it so horribly wrong you’d have to imagine there will be other contractors out there who may have got it wrong as well.

When making new bids and reviewing new contracts put on the table, contractors will really be putting them under the microscope to a whole new level. There’s been a feeling amongst contractors for a while that too much responsibility is being put on their shoulders. The Fletchers case may well prove to be a watershed moment for the industry that sees contractors become even more particular about the contractual terms they’ll agree to which may also require changes to the regulatory environment.

• Will design and build’s popularity decline?

Given that contractors aren’t going to be prepared to accept the same levels of risk that we’ve seen, the future of design and build comes into question. Under design and build the weight of responsibility falls largely on contractors and in the current climate many will take the position that it’s just not worth the risk. I think we’re moving back to centre ground and how things always used to be done whereby the client is in charge of the design and the contractor is responsible for the build.

What all of this points to is an even more pressing need to have a QS on board who is going to robustly challenge costs and variations.

Cost certainty

So for those project sponsors that had previously tried to shift as much responsibility to their contractor as possible, they’re now faced with the challenge of achieving project cost certainty in a constrained, low-risk appetite environment.

Engaging external comprehensive cost management services, and doing so early, is the best way to give your project the financial confidence it needs. For many of our clients at White Associates, the cost estimates we provide can often come as a bit of a shock. But they soon find out these are realistic appraisals and that we were absolutely right in our assessment. Finding out early gives you the ability to make informed decisions to keep your project within your chosen budget, avoiding cost blowouts further down the line.

Any competent cost planner should be able to accurately forecast costs in the current market, not last year’s market. There’s talk in the industry at the moment of tenders coming in over budget. That should never happen. Full stop.

So if you want to give you project financial confidence from day one, have a chat to us at White Associates about what we can do for your project. Email us at: info@whiteassociates.co.nz

An exciting new project is underway that’s set to attract thousands of people to the western end of Christchurch’s retail precinct.

Riverside Farmers’ Market will be a high-end retail development on the site of the Re:Start Mall -bordered by Cashel and Lichfield streets and Oxford Terrace. It will include a farmers’ market, restaurants, food stalls and retail shops.

The development by Peebles Group and partners Kris Inglis and Mike Perkasky is going to become a hub for events in the city as farmers’ markets in central business districts around the world continue to grow in popularity as people turn to healthy eating of local produce.

Investor Richard Peebles says he’s wanted to do a farmers’ market in the city for a long time but finding the right location had been difficult until the Re:Start site and surrounding land became available through Crown company Ōtākaro.

Richard explains;

“The way I see it, there is nothing else in the city that’ll attract people like a market will. The footfall produced by a market is unrivalled, which means that surrounding businesses also win – and nothing attracts people like people.

“The markets also offer the ability for small businesses and entrepreneurs to essentially incubate their businesses – barriers to entry are low,”

A buzzing attraction to light up Christchurch

The farmers’ market will house around 30 ‘ready to eat’ vendors alongside around 40 stalls offering local produce such as fresh fruit and vegetables, baked goods and flowers.

The combined development will also include 15 high-end fashion and retail tenancies, four mezzanine floor hospitality opportunities and an open roof top bar. There will also be a roof top outdoor area and a large internal seating mezzanine floor above the market.  Outdoor seating will spill onto Oxford Terrace, which is being paved and pedestrianised, to create a lively and engaging destination for locals and tourists alike.

White Associates has been providing bank funding representation for the Peebles Group for this development. White Associates Director Darin Bayer says he’s thrilled to be involved in such an exciting and transformational project.

“This development will be testament to what can be achieved from incredible vision, thorough planning and a strong commitment to providing the Christchurch community with an outstanding new precinct,” says Darin speaking of the Peebles Group.

Enormous impact on Christchurch

The development is going to be great news for Christchurch and the developer Richard Peebles says it’s going to be a hub for events in the city. A riverside area will host weekend arts markets and events such as night-time festivals.

Richard says there will be around 18,000 people working within a small radius of the market, meaning it will become a staple morning, lunch and dinner time destination and the place to get fresh produce and specialty meats for dinner on the way home.

Peebles Group has been involved in several other central city projects, such as the McKenzie and Willis development on High Street and a three storey build on the Hereford end of The Terrace that will house bars on the ground and first floor and office space at the top.

“It’s great to be part of the building momentum.  The city is really beginning to take shape and the next 12-18 months are going to be fundamental to the ongoing transformation. The CBD is going to be far more densely populated compared to pre-quake, which is going to make everything a lot more lively and active,” says Richard.

Construction is now underway is expected to be completed towards the end of this year.

White Associates would like to sing the praises of one of our own – quantity surveyor Justin ‘Balboa’ Bearne who raised more than $3200 for Cure Kids after taking part in a corporate fight night recently.

After months of training, Justin emerged victorious from the bout held at the Langham Hotel – much to the delight of everyone from White Associates, especially those of us in attendance.

More important than the win though was Justin’s dedication to supporting Cure Kids and its vital child health research.

Ringside NZ takes mild mannered corporates, both guys and girls, and transforms them into professional fighters – all in the aid of a good cause. All of the fighters on the night were raising money for Cure Kids and together raised more than $56,000 – with Justin being one of the top contributors.

“I really wanted to make a difference. I’m inspired by the work of Cure Kids and wanted to support them by raising money as part of my participation in Fight Night 2017”

As part of the initiative, all of the fighters involved had Cure Kids Ambassadors, Justin met his recently – a young girl named Addison who was diagnosed with a heart defect in 2012. Addison has undergone multiple surgeries to combat a staph infection. Unfortunately the infection caused damage to her heart, which means she will likely need more surgery to correct her condition as she grows.

All of us at White Associates are incredibly proud of Justin for all of the hard work he put and for spreading the word about Cure Kids and the amazing work they do for kids like Addison.

Thanks for doing us proud, Justin!

Work is set to begin on the construction of a new 20-bed Management Unit at Christchurch Men’s Prison, following the appointment of Naylor Love as the main contractor and White Associates to provide QS services for the project.

The unit forms part of the Department of Corrections’ Prison Capacity Programme, which is all about creating fit-for-purpose facilities that add capacity across the prison estate.

White Associates Director Konrad Trankels says:

“We are excited that the main contractor has been procured and that Naylor Love is about to commence on site. It’s great to be working with them – the project is in good shape moving forward.”

By Graham White

Never in my 40 years in the construction industry have I seen contractors be as selective in the work they choose to take on as they are now. Just getting a contractor interested in bidding for work can be a challenge in itself.

The onus is now on developers to come up with more attractive propositions and consider alternative forms of procurement.

Piquing contractors’ interest

A year ago it seemed that contractors had the desire and the capacity to undertake new projects. Finding a contractor was relatively easy: you could go out to market and get several good, competitive bids.

Today however, many are suffering the consequences of overtrading last year and are struggling with resources – both internally and externally. We’re finding a lot of projects are under pressure as contractors battle to meet programme dates and quality standards. As a result, they’ve become very particular about which new projects they take on, and they are turning down large volumes of work.

The solution?

When we talk to contractors, they tell us that they’re busy, but they also say that if you come to them with a good proposition they will be interested. So what does ‘a good proposition’ involve?

1. The ability to negotiate – Go and talk to contractors. And do it early on. If it’s just a straight out negotiation, they’re more likely to be interested.
2. Minimal tender effort – Contractors make money when they’re building, not spending time and money tendering against three other firms for a project that might not eventuate. And from a developer’s standpoint at the moment, for many projects it can be too risky to spend money on going to tender only to find that not enough contractors want to bid for it, the prices aren’t competitive enough or contractors withdraw during the tender period.
3. A reasonable budget and timeframe – More so than ever, contractors are putting project budgets under the microscope, asking themselves if they will be able to make enough money on a job. They’re paying more for materials and for staff – both to get the resources they need and hang on to the resources they have. If the budget isn’t there and the timeframes are too tight they will just pick another project over yours.
4. Funding already in place – Get funding upfront so that when you speak to contractors you can reassure them that funding in place and that the project will definitely go ahead. Come and talk to us at White Associates about how we can help you do your due diligence to help strengthen your bank funding application.

Selecting a contractor in a strong financial position is particularly important given what we’re hearing…

Protect yourself from the black cloud looming over the industry

Several industry experts believe a perfect storm is brewing and it’s just a matter of time until a relatively big player – or players – in the construction industry go under.

The flow-on effects from a contractor, or subcontractor, going into receivership could have catastrophic effects for some developers.

This is why at White Associates our payment policies have so many qualifications to make sure our clients never pay for work ahead of progress. Every month, before we sign off payments for contractors we ensure onsite inspections and quality checks by design consultants have been carried out so that the work our clients are paying for has been completed to spec.

Engage QS teams to make informed decisions

All of this highlights the importance of having skilled quantity surveyors on board to help engage the right contractor for the right price, control cost and minimise risk.

As one of New Zealand’s leading quantity surveying consultancy firms, we’re in a unique position at White Associates to offer solutions to help developers navigate what has been described as the most dangerous time in the current construction cycle.

If you have a project you’d like to discuss with us, please feel free to get in touch on (09) 362 0624 or email info@whiteassociates.co.nz.