The construction tsunami about to sluice though the economy may force property owners around the country into new contracting models if they are to attract their building contractors and consultants of choice.
Contractors are hungry at present as they have geared up for the Christchurch rebuild and that work is not yet flowing. Soon, however, these dynamics will be reversed and they will be inundated with work, which will shift the bargaining power of the parties.
It is even possible – perhaps even probable - that contractors may start declining to participate in traditional tendering methods with their high bid costs and no guarantee of success, because the market is going to be extremely hot. BIS Shrapnel is projecting a $46 billion building boom in New Zealand over the next five years. Contributing factors include:
- high immigration, both foreign and local, into Auckland
- earthquake strengthening work in other population centres, notably Wellington, and
- repairs to leaky buildings (Auckland, Wellington and Tauranga).
But by far the largest contributor will be the Christchurch rebuild. This has been in ‘hibernation’ as insurance, land, consenting and funding issues have been worked through. However some important building blocks are now in place.
A major impediment to progress was removed in June when the Government and the Christchurch City Council agreed the cost sharing arrangements for the $4.8 billion spend on anchor projects in the Christchurch Central Recovery Plan and for the repair and replacement of the city’s horizontal infrastructure.
And, the Council’s competency and accreditation issues notwithstanding, $940 million of consented works were in the pipeline at March 2013, up 50% on the previous six months. We are also starting to see private developers tie down key anchor tenants for their developments – typically a pre-condition to awarding a construction contract. The cost of the total rebuilding effort – involving both public and private investment – has now been raised from $30 billion to $40 billion.
To manage this volume of work would need, by one estimate, around 27 companies the size of Fletcher Construction, yet we are going into it having lost one of our ‘top tier’ operators with Mainzeal’s descent into insolvency earlier this year.
The industry is looking forward to the challenge with a mixture of excitement and trepidation. A recent survey by AECOM quotes Davis Langdon New Zealand director, Trevor Hipkins, as saying:
“Although the peak of this work is anticipated to be at least a year or two away, we are starting to see some increased pressure on resources in the construction and property consultancy sector.
“The pressure will gather pace and we anticipate that building costs will start to increase significantly once the rebuild gets underway. This will also have a knock on effect on resources and margins throughout the country”.
For property owners planning to build, this means either moving quickly to stay ahead of the demand surge or, if this is not possible, being prepared to engage in new contracting and procurement techniques.
A contracting option which is getting plenty of air time in Christchurch is Early Contractor Involvement (ECI) – an arrangement which, as the name implies, brings the contractor in earlier at the design stage. The appeal of this to contractors is that they can embed themselves in the project at an early stage - with the result that the construction contract becomes theirs to lose.
The main advantages to the owner are that it can help attract the preferred contractor, it fosters a collaborative working relationship and can potentially save time and money. The main disadvantage is that it may become very difficult for the owner to ‘go to market’ for the construction contract if it is not satisfied with the contractor’s price or schedule for the construction phase. Time would be lost, the market may not offer better terms and, in the meantime, the ECI contractor may become unavailable due to other jobs.
The key to success under the ECI approach is that the parties have a mindset of collaboration and acting in good faith.
The ECI approach sits well with the use of a Building Information Model (BIM). This is also being explored for use in Christchurch and involves the virtual construction of a building before it is physically built to give assurance that it will be fully fit for purpose.
The owner, its consultants, the contractor, proposed sub-contractors and suppliers all input important information into the BIM, including design, engineering, materials, equipment (right down to the manufacturer and part number), quantities and pricing data. Developing a BIM is a complex exercise but can reduce the risk of cost over-runs or of unanticipated problems emerging during the building’s construction and also later during its use.
It will be interesting to see how the construction sector in New Zealand copes with the vast amount of construction work that will come online over the next few years. Bargaining power will shift to contractors, and savvy owners/developers will appreciate this and will be thinking ahead of strategies to deal with it.
This article first appeared in the August/September issue of boardroom Magazine.