Property Council Wellington member, Richard Van Looy, Associate Director at WT, shares his views on how we can build a thriving construction industry, with a better, brighter future for inhabitants of Wellington.
Sustainability is a bit of a buzzword these days. Whilst environmental sustainability may be the area that first comes to mind, today let’s discuss the economic sustainability of the Wellington construction industry.
It’s no secret that the Wellington market is currently being squeezed. Main contractor tender margins are hovering around the current OCR rates, their phones red hot with calls from subcontractors and suppliers eagerly chasing the next potential opportunity. This is not sustainable
To really understand the current situation, we need to look deeper than the main contractors and their margins as a market indicator. It is not the main contractors that drive the overall tender price as the tender pricing is largely driven by the subcontractor market. Main contractor margins move within much narrower margins than the subcontractor market.
Wellington is a tight market, with a relatively small pool of subcontractors, especially ones capable of delivering more specialist trades at significant scale. As a result, these subcontractors have greater ability to fluctuate the market.
The typical cyclical scenario appears to be:
Good times: subcontractors margins jump, become under resourced, ‘find’ some additional labour, struggle to deliver on commitments, performance and quality drop.
Slowing times: subcontractors now ‘over resourced’, worried about securing forward workload, margins trimmed, hire purchase agreements for their utes, boats, jet skis etc, suddenly start to bite.
Recessionary times: subcontractors’ contract to bare minimum resources, look for cashflow rather than margins to service their overheads and maybe keep a couple of key staff going, skills and knowledge are lost from the industry.
What are the drivers for this cyclical behaviour?
Sporadic investment and lack of long-term planning, available competitive funding, assured commitment, short government election periods, and ‘annual’ budget approvals all impact on creating a sustained pipeline of work. Consequently, market confidence is weaker which limits contractor maturity, restricts forward planning, growth, and contractor commitment to developing efficient sustained businesses that can operate at steady and consistent margins.
Despite the lag between consultants becoming busy, to when main contractors start to fill their forward workload, followed by the subcontractor trades, dare I say it, I am seeing the first signs of increased activity within the Wellington market.
Now is the time to work together to establish a more sustainable way of doing business to break the cycle. How?
Let’s build on our relationships with our clients, developers, government entities, and funders.
Work with them to establish business needs, strategic and planned investment, current and future maintenance needs, and available funding sources.
Support them in developing their pipelines and procurement strategies so that they can better understand and what their future business looks like and how to achieve this. Most importantly, broadcast these outcomes to our delivery partners. Give them confidence in these pipelines, provide timeframes, and commitment so that they can develop their businesses in a mature and sustained way.
Let’s break the cycle, develop a sustainable economic strategy, and a thriving construction industry, building a better, brighter future for our inhabitants of Wellington.
Author
Richard Van Looy, MRICS
Associate Director, WT
Richard has 30 years of experience within the quantity surveying profession. Having experienced the Wellington construction industry from roles within professional and main contracting positions since 2007, he has first-hand experience of the cyclical nature the Wellington market has experienced. He is passionate about the property and construction industry and takes pride in knowing he has played a part in bringing projects to life, projects that stand in our cityscape for future generations of Wellingtonians to enjoy.
Richard currently leads WT’s commercial and infrastructure quantity surveying teams in Wellington.