Upward pressure on costs


I hope you have had a great Christmas and New Year, with a break from work and plenty of opportunity to enjoy the summer weather.

2014 promises significant growth rates for the building industry as we move out of a very deep bust cycle and into a boom.

The Canterbury rebuild will be a significant contributor to the construction sector’s expansion. This is not just a big story for Canterbury, but for New Zealand’s history.

Growth in nationwide construction activity during last year was the strongest since 2000, with residential activity leading the way with 19% growth p.a. — and this growth is forecast to continue.

Non-residential activity is also set to grow in response to high export prices, strong growth in consumer spending, remediation of leaky buildings and earthquake strengthening.

This growth will undoubtedly be accompanied by good employment growth, rising wages, inflation and interest rate increases. These factors will contribute to a significant increase in building costs over the next four years, as indicated in the Infometrics graph at right.

These rising costs can be a minefield for building companies, and explain why so many fail coming into a boom cycle. Growth in our industry is never steady as it almost always comes in spurts, which can be challenging to manage.

Richard Carver’s words from his excellent presentation at the Registered Master Builders Conference last year still ring in my ears. He pointed out that “95% of all the money that comes into a building company goes straight out to other people, mostly within a couple of weeks”. That doesn’t leave a lot of margin for error, and also highlights the degree of financial responsibility required.

If rates and margin increases, along with productivity, don’t keep up with building costs then business failure is inevitable.

Another additional factor to consider when planning for the increased workloads ahead, I believe, will be the impact of the Licensed Building Practitioner scheme on residential building timelines.

Our LBPs will only complete or supervise the workload that they feel comfortable doing while still protecting their licence.

They will want to ensure work is completed properly. This may have the effect of lengthening the predicted boom.

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