New Zealand is experiencing the biggest construction boom in 40 years and it’s not expected to peak until 2020.
But despite strong and sustained growth in the building sector, industry experts have warned that this is “the most dangerous time” in the construction cycle.
The new Labour government has announced plans to build 100,000 affordable houses over the next decade, which suggests there will no shortage of work for tradies for many more years.
On the surface, this may sound like great news.
However, there is a darker side to the construction boom. The buoyant market and the increased demand and pressure on builders carries with it serious risks.
Recent research from ANZ signals increased risk for the construction sector around, particularly around cash flow, over the next year.
Understanding those risks and taking steps to safeguard against them could be the difference between success and failure for your business.
Risks of New Zealand’s building boom
It’s natural to want to cash in on the construction boom. However, when demand for your services is high, it’s easy to take on more work than you can handle.
This is one of the signs of overtrading. It essentially means you’re growing too quickly and don’t have the money and resources (staff, subcontractors, materials) to manage the growth.
It’s a major risk to building companies during a construction boom. The solution is to stay on top of your cash flow, and only take on new business when you know you have the resources required.
Higher costs and lower margins
The construction boom resulted in a 6.7 per cent increase in residential building costs in 2016 (8 per cent in Auckland).
There is also a nationwide skills shortage for builders and construction workers. Historically, this has resulted in higher wages, which would also drive up costs for employers.
The cost of construction is going up, but property prices are leveling out. This means that the profit margins for building companies are lower.
The research from ANZ has found that despite strong activity in the industry, the combination of slow property price growth and major spikes in construction costs is beginning to squeeze project margins and increase the risk/reward profile of new projects.
Getting paid for a project is most important, but when you get paid can have a huge financial impact on your company.
Late payments from a customer results in poor cash flow for your business. If your business is already under pressure, late payments for a couple of big projects could create serious problems.
If you don’t have the cash to pay staff, subcontractors, and suppliers and start incurring penalty fees, the spiralling debt may be enough to put you under.
This risk is heightened during a construction boom as you’re more inclined to be stretching yourself in terms of cash and work capacity.
Subcontractors and labourers are often most at risk of late payments during a construction boom as they are at the bottom of the food chain.
If you’ve done work for a principal contractor who doesn’t have the money available to pay you, you face being out of pocket until the cash comes through.
How to manage the risks
Most of the risks associated with New Zealand’s construction boom can be avoided by working within your means and managing your finances.
BRAVEday insurance advisor Kane Butler says there are added protections tradies should consider if they want to safeguard themselves from the worst that could happen.
- Subcontractors payment guarantee: This is insurance cover designed to protect subcontractors when the main contractor on a project goes bust. If you have lost thousands in unpaid invoices, this type of cover will pay you a large portion of the money owed.
- Trade credit insurance: This covers the risk of non-payment of “trade debt” – money owed to your business by other businesses. It’s designed to protect your business from a customer defaulting on payments or going into liquidation.
- Contractor retention bond: Rather than holding retentions on trust, you can take out a bond with your insurer for each project that covers the total amount of retentions held on that project. That way, if the main contractor goes bust, the retentions don’t become mixed up in the liquidation process and subcontractors can make a claim directly to the insurer for the retentions they’re owed.
Does your trade business have all its bases covered? It pays to check—and with our quick-check guide to tradie insurance, it's easy!