The world has changed since we released our last New Zealand construction sector report in August 2021. Inflation and interest rates continuing to rise, and the Reserve Bank is actively pursuing a slowdown in our economy. In addition, climate change has been taking a very real toll on our country and its infrastructure – we will take months and in some cases years to recover from the flooding from Cyclone Gabrielle in February 2023 and other weather events. And these will not be the last natural disasters our country has to overcome.
A two-tiered construction sector
So how does this impact the construction sector? This report features survey responses from construction businesses, with a weighting towards larger scale, commercial entities. Since 2021, the construction sector has proved its resilience. Despite tough economic conditions, most construction businesses have had more work than they can manage – and even now, in this year’s survey results, we are seeing a good level of optimism, with many businesses continuing to manage cash flow and margins well. One respondent’s comments are telling; “We have been through many tough times over the years and are well-positioned both financially (in terms of cash flow and retained earnings) and resource-wise to ride this out.”
That said, the report shows a definite drying-up of forward work for many construction businesses, who are well placed for the next few months, but may be suffering from a lack of work in around six months’ time. This is particularly the case for the residential sector and smaller construction organizations, where confidence is waning.
Moving beyond boom and bust: focus on what you can control
The way to deal with this economic uncertainty, is, as ever, managing finances and risk correctly – focusing on what you can control. Strong cash flow, project and margin management are essential to overcoming any economic difficulties that New Zealand may be experiencing. One of our respondents to this year’s survey noted the need for the sector to “stop these boom bust cycles.” The only way to do this is by taking control – there will always be ups and downs in the economy, but strong financial and risk management, through both the good times and the bad, will be what sees our construction sector thrive. The organizations that do this well, will be better prepared to take advantage of the future upswing in work once the uncertain times abate.
Potential for boom bust cycle to play out differently this time
There is a possibility for the boom and bust cycle to play out differently this time around. We know that there are parts of the sector, especially residential and lower turnover businesses, that are suffering from significant challenges, with margins eroding from high costs, labour shortages and declining house prices. However, the only silver lining of the recent weather events is that it is these types of businesses that will be the ones that carry out repair and insurance work. When we get to the bigger end of town, which are more represented in this survey, they have a much stronger forward work position – and therefore may be able to ride out this boom bust cycle more comfortably.
For many years BDO New Zealand has undertaken a survey of the national construction sector. The purpose of the 2023 BDO Construction Sector report has been to not just talk about the trends and results, but also to give advice and tips throughout to help construction companies overcome the challenges highlighted in the report.
