New Zealand’s construction sector is at a COVID-19 crossroad. The 2021 BDO Construction Sector Report – ‘Rethinking Construction’ – released today, explores how the disruptive forces brought about by the global pandemic have necessitated a rethink regarding the most effective strategies to operate successfully in and drive the sector forward – building a foundation for broader economic growth. Should New Zealand face an extended Alert Level 4 Delta strain lockdown through 2021, this may prove a pivotal crossroad, driving impetus for prioritising strategic change.
Gross profit margins in the construction sector grew slowly from 2018 to 2020, but the arrival of COVID-19 completely changed the roadmap for most construction firms, some of whom are treading water, a year later – and now facing the impacts of a Delta strain lockdown.
Our 2021 Report sheds light on priority areas of concern and opportunity, and where fresh thinking is required, with a particular focus on; supply, labour, and inflation.
Rethinking supply chains
The biggest challenge the report highlights in construction now is supply; the pandemic has reduced shipping capacity, leading to supply chain issues across the globe. The report also shows that this has led to stockpiling by some firms ordering in advance, which exacerbates the problem, and feeds into inflation.
Rethinking inflation
Cost increases are putting pressure on firms, and many increases are now in double digits. Because contracts tend to have fixed prices, firms are seeing losses on projects that were planned to be profitable, and therefore gross margins are being eroded. The sector is still grappling with how to rethink this issue, and it remains a critical point in the report.
Rethinking labour supply
The final key challenge is labour supply; nearly everyone in every industry is struggling to find workers. Construction sector employers who are able to increase salaries have been able to retain staff, but it’s clear this isn’t an option for those who have been hit especially hard by the previous two points. The report suggests that a better long-term solution is creating more skilled labour within the industry, rather than trying to attract skilled labour to it. Essentially, this means focusing more on upskilling current staff and establishing succession planning strategies, rather than a reliance on work visas and focusing on hiring new staff - but this can't be achieved quickly enough.
Other priority areas
The report also highlights risk management and financial foundations as areas of interest; both are important for understanding the current state of the sector, and its potential future. The report reveals that the forward work position is at its strongest since we started our surveys, and there is a lot of future work being negotiated now by larger firms in the industry. Even if some of this work doesn’t come to fruition, there is potential for the sector to grow, but subject to sufficient labour. This sounds positive on the surface, but it’s an indication of a growing divide between big and small firms; profitability may be held for bigger firms and decrease for smaller firms, which won’t be good for the sector overall.
For more, visit our website and connect with our BDO construction sector team.