Auckland's MR8 Construction goes into voluntary administration hot on heels of government and key industry players signing a Construction Sector Accord

Auckland's MR8 Construction goes into voluntary administration hot on heels of government and key industry players signing a Construction Sector Accord

The construction sector's deep seated problems remain an ongoing issue as yet another construction company goes into voluntary liquidation.

It follows the Government announcing a new Construction Sector Accord on Sunday in a bid to address many of the issues the industry is facing.

Auckland’s MR8 Construction went into voluntary liquidation on Monday. Waterstone Insolvency's Damien Grant was appointed liquidator. The company was involved in a number of residential and commercial property projects.

According to the Companies Office records MR8 Construction changed its name to BHSSR Holdings on Thursday last week before it went into voluntary liquidation on Monday. The sole shareholder is listed as Manurewa resident Stephen Murdoch.

How much creditors are owed and exactly who is owed what is yet to be established, but it is yet another company in a booming market going belly up.

It comes on the back of the recent failures of the likes of Arrow International and Ebert Construction, as well as Fletcher Building's well publicised problems.

But figures released by Statistics NZ in late March show the non-residential construction industry is booming. According to its quarterly value of building work report, non-residential buildings in Auckland drove the construction industry’s overall volume growth in the December 2018 quarter.

The actual value of non-residential building work nationwide was $2.2 billion in the December 2018 quarter, an increase of 11% from the December 2017 quarter. While in Auckland, the value of non-residential building work grew by $200 million to $879 million, an increase of 29%.

Just last month Auckland Council chief economist David Norman said such collapses were often a reflection of demand side pressures in the industry.

“People look at the construction sector and see that it has been booming and say ‘how could a company go bust?’. But in any form of vertical construction where you see these huge increases in demand it becomes hard for businesses to accurately price their contracts.”

Norman says in the construction industry contracts can sometimes be agreed on years in advance, but they may not take into account inflationary pressures in the industry.

“We’re also seeing a lot of cash flow issues as well, so it has been a big challenge.”

The Government announced on Sunday that it had signed a new Construction Sector Accord with a number of key industry players. Minister for Building and Construction Jenny Salesa says the Government is trying to help address many of the challenges the industry is facing.

Under the agreement the Government has committed itself to improve the industry’s workforce capability and capacity with a Construction Skills Action Plan. It will also establish the New Zealand Infrastructure Commission to create a coordinated long-term plan for all government construction projects and it will also look at better procurement practices across the public sector.

Signatories to the agreement include Fletcher Construction, Naylor Love, Downer NZ, Tonkin and Taylor, Fonterra and the Construction Strategy Group, as well as the Ministry of Business, Innovation and Employment, Ministry of Health, Ministry of Education, NZ Transport Agency and Housing New Zealand.

And the new accord was welcomed by Auckland Mayor Phil Goff who stated:

“I welcome Government’s construction sector accord. Agreeing a set of principles between central government and the construction industry to work together and find solutions to critical issues in the sector will help create a more productive and resilient construction industry, and lift the pace and scale of housebuilding in Auckland and New Zealand," says the Mayor.

“I am pleased the government has picked up recommendations from Auckland’s Mayoral Housing Taskforce including addressing skills and labour shortages, sharing risk and ensuring a pipeline of work to help the sector flatten out the peaks and troughs of building activity that constrain employment opportunities in the sector.

“A high performing construction sector benefits us all. It delivers more new houses, which Auckland and other high growth cities desperately need, employs over a quarter of a million workers and accounts for 7 per cent of New Zealand’s GDP.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Amongst the blather about the construction industry, the article manages to nail (sorry) the two crucial issues: "industry contracts can sometimes be agreed on years in advance, but they may not take into account inflationary pressures in the industry ......seeing a lot of cash flow issues".

So what causes 'inflationary pressures"?

  • Minimum wage increases
  • regulatory (e.g. TLA inspection fees) rises
  • Falling effective/unhedged FX rate on imported materials
  • Increased compliance (Elfin Safety, BRANZ) or new standards suddenly imposed
  • Congestion and other logistics foobars

And what causes 'cash flow issues'?

  • The injection of Time into any process (Time = Munny for those not in Gubmint....) via inspections, compliance shutdowns, and other 'for yer Own Good' delays
  • Tighter lending standards (natural responses to Haynes downstream effects, bank capital ratio changes, remuneration untied from sales, adjusted risk profiles - and construction is notoriously Risky)
  • Shorter payment cycles demanded for subbies, suppliers and those Modest Fees from Gubmints

And then the working group will gape in astonishment as all their favoured Solutions run up against the hard rock of 'nothing in the Bank, No Mo' Loans, cannot pay the Carry...' - cash flow is King/Queen....

Contracts for residential builds factor in changes in cost of materials etc. Why do you reckon commercial construction outfits are not factoring in inflation or hedging properly? Seems like an operational failing to not do that.

Cost structures are too expensive for business to deliver what the market can afford?

Seems to be a major battle in NZ and Australia. Even in FMCG, price discounting and promotions are necessary to meet sales targets. According to Nielsen, highest incidence of price discounting and promotions among comparable countries.

Don't even mention Elfin safety.. just been redoing permit receiver refresher for an upcoming project at a certain well known NZ company. Had to do a permit for a scenario.. 5 pages of paperwork that are "required" to be filed out to safely execute a job. This job (apparently) requires a job safety assessment, a permit to work, a rescue plan, isolations and a guy to do the work and a safety observer. To actually do it this way would take a minimum of 45mins, involve 3+ people and thats if everybody is available to do their bit when you need them to sign off on the various bits of paper.

The job.. change a fluorescent tube in a staff canteen. In the real world it would take a single competent person 10mins to do, and 8 of that would be fetching the ladder and the right sized replacement tube.

Thats all very well but kiwi attitude to safety is atrocious. Walked past a small building site last week that had a large sign outside showing everyone had to wear hard hats / hearing protection/ eye protection etc. Couldn't see it in evidence anywhere. In Oz where I worked a few years ago you could spot the kiwis at the safety meetings giggling amongst themselves at the "absurdity" of it all.

A sign showing everyone has to wear X Y & Z.. but was there anything going on that justified actually wearing those items? No point wearing a hard hat if there is nothing being lifted above you that can fall on your head, and hearing protection, yep, if nailguns and jackhammers are being used sure, but if you're trying to talk to the guy lifting something into position you're better off taking the damn things off so you can hear each other clearly and avoid miscommunication which can cause actual accidents. Eye protection is usually not a hinderance.. but for myself I often have to ignore the safety glasses sign on the site i'm just about to head out to visit, because when you walk out of the fridge into the walkway where you are supposed to wear them they fog up and you can't see a bloody thing. Blind conformity to daft signs is often detrimental to your health (and definitely your sanity)

Your Joking are you not ? I used to go round every company I have worked for changing fluros's and the starters in the older ones, even replacing the complete units when the lamp terminals or starter terminals fried. The tubes cost a few bucks each, I cannot imaging what it costs with this system, what a joke....like the one "How many people does it take to change a light bulb".

The agreement may be viewed as significant by those outside of the industry. It is just a bunch of words, not actions. The Minister has barely any interest in the construction industry which I have found disappointing, she does not want to look at the regulatory problems that have been created.

A common strategy to win jobs has been to price on no margin and then gouge of the client for extras. However a competent design team will hammer down or eliminate any variation claims. This leaves a company that price to do the work for no profit right from the start, any unanticipated costs then make the job a loss. This is outright mismanagement, it could also be viewed as trying to bully people out of the market (which obviously backfired for Fletchers). Even if none of this was correct the construction companies are not pricing contracts correctly at the start which is very poor business practice, as well as a misallocation of capital.

Talk of cash flow issues stems from my comments above. If you do not make a profit you will run into ever increasing cash flow problems. Many companies have used their creditors as an interest free loan, however you need materials and workers to construct buildings. If you don't pay or rip people off that source of credit can dry up pretty quickly.

In the regulatory environment hold ups and delays that are frequently created can destroy any profits that might be there. MBIE will not want to look into harm created by the regulatory environment as that responsibility falls on their shoulders, along with the Minister who does not take any interest in taking action.

Sadly, there will be plenty more to come.

"Just last month Auckland Council chief economist David Norman said such collapses were often a reflection of demand side pressures in the industry."

Of course he did.

Draconian supply side constraints imposed by Auckland Council (employer of chief economist David Norman) prior to late 2016 were such that land costs were positioned artificially high. Then in 2017 a large new supply of land was flooded onto the Auckland region by Auckland Council. Any number of firms that had started development prior to 2017 are now faced with insurmountable cost structures compared to more recent competitors with less absurd cost structures.