The failure of a South Island building company may be a sign of things to come for the construction sector.
Photo: RNZ / Alexander Robertson
Otago Homes Limited, a franchise of Landmark Homes, entered into voluntary administration last week.
Landmark chief executive Gary Woodhouse said the company had run into cash flow issues amid material and skills shortages which were driving up costs.
BDO partner and construction industry specialist James MacQueen said the situation was not unique and he expected "a lot more" firms to collapse later in the year.
He said the demand for housing combined with pandemic-related disruptions to supply lines had pushed construction material prices 30 percent higher over the past 18 months.
On the labour side, the industry was already struggling to find skilled workers prior to the pandemic but the situation had deteriorated even further since borders were forced shut, he said.
This had placed significant pressure on the balance sheets of many firms which were unable to pass on the rising costs because they were locked into fixed-price contracts that had been entered into before inflation pressures began to emerge at the end of 2020.
"I think by the middle of this year we will start seeing more collapses because it's pretty tight out there at the moment," MacQueen said.
"I think it's going to be mostly in the smaller [firms rather] than the larger ones because they are the ones who have weaker balance sheets."
But he did note that larger companies were not immune.
Australia's sixth largest construction firm, Probuild, had recently been placed into administration as Covid-19 restrictions hurt its profitability, he said.
MacQueen said his advice to firms was to avoid taking on risks they cannot control, such as entering into fixed-price contracts.
"Any work people do has to be at good margins with good clients, otherwise don't take on the contract, don't take on the risk."
However, that was not all that simple because there had been reports that banks were reluctant to lend on projects where the developer or the builder could not offer a fixed price on the project's cost.
In some cases, developers were pulling out of projects before they had even started them because they were no longer viable in the current housing market or they could not secure funding from banks, MacQueen said.
Omicron effect
The Omicron outbreak was causing significant disruptions to building activity because the spike in cases meant many workers were forced to isolate.
"I've got one client, two weeks ago, they had 134 people on one of their sites. Last week, they were down to six people," MacQueen said.
He said he had other clients who had no choice but to close work sites temporarily because they did not have enough available workers.
The delays were likely to result in "liquidated damages" which are financial penalties construction firms receive for not delivering a project on time.
MacQueen said the provisions that were added to a lot of building contracts after Covid-19 emerged did not foresee the consequences of a mass outbreak like Omicron.
He expected this would lead to a rise in legal disputes between head contractors of big projects and their clients to determine who would play.