Naylor Love CEO pessimistic as projects stall

The biggest issue facing the construction sector is maintaining the pipeline of projects funded by the private sector, Rick Herd, chief executive of Naylor Love, tells Rod Oram

Finishing off current projects will keep construction companies busy for the next six to 12 months. But looking ahead, recent industry data from Pacifecon shows some 250 projects have already been postponed and more are likely to follow, given the uncertainty of economic activity and thus demand for buildings and the increased difficult in financing them.

“I'm personally quite pessimistic about the situation at the moment,” says Naylor Love CEO Rick Herd. “I lived through the ‘87 stock market crash and I see some very distinct parallels between that situation and what's happening now.”

The collapse in construction activity in the late 1980s caused a large loss of capacity and skills – both construction and business ones – which dogged the sector for decades. That was the root cause of its struggle to meet demand over the past 10 years. Moreover, a failure to manage and price risk was a common theme in the failure of half a dozen major players over that time, Herd says.

Maintaining momentum and capacity now is a complex challenge for property developers, funders such as banks, construction companies and the Government to solve. Herd welcomes the Government’s plans to ramp up infrastructure spending. But that funding will go mainly into public sector projects such as roads, schools and hospitals.

"Unless the Government can find a mechanism to give the sector confidence to keep building the whole thing will collapse, in my view.”

In contrast, the vertical commercial construction sector depends heavily on private sector funding. While it’s inappropriate for the Government to use public sector money to alleviate some of the private sector’s risks, Herd says, there are ways it can help. For example, the Government can commit to be a long term tenant in a new building or it could encourage an iwi, for example, to proceed with a current project by offering it a block of land for future development.

“I think the Government needs to be a little bit innovative with property developers and funders to stimulate the work that they're doing. Unless the Government can find a mechanism to give the sector confidence to keep building the whole thing will collapse, in my view.”

The sector and government are well placed for such discussions, Herd says, because of the structures and relationships they have developed in recent years. The work began some five years ago after a number of major construction companies collapsed. Herd instigated the Vertical Construction Leaders Group under the auspices of the Registered Master Builders Association. Its initial focus on health and safety broadened quickly into issues about the whole sector’s skills, capacity and resilience.

In stages this led to the Construction Sector Accord between the sector and the Government last April and their Construction Sector Transformation Plan launched in January. This is focused on six areas: leadership; business performance; people development; health, safety and wellbeing; regulatory environment; and procurement and risk.

Meanwhile, the sector is also working through some immediate impacts of the lockdown, such as the increased costs incurred because of it. Property developers, contractors and sub-contractors will have to work out how to share those equitably, Herd says.

“Our clients are typically large property companies, which are getting it from both ends. They have tenants who are saying we can't afford to pay the rent. Their property values are going to be decreasing. And then we're coming at them saying we want more costs for this project. And by the way, we really want you to keep building the next project you've got in mind. So, the message we're giving to our subbies and the message I’m giving to our commercial teams is we’re all in this together. We're all going to have to take some pain in this.”

In practical terms, however, the sector was well-prepared to go back to work last week after the lockdown was eased to Alert Level 3. Construction Health and Safety New Zealand had developed a framework standard to guide construction companies on how to operate in these virus times with the likes of staff track and trace, work practices, hygiene and site cleaning; and benign weather across the country during the lockdown had caused little if any damage to incomplete structures.

The new practices will have a varying impact depending on the stage of a project. Early on when steel is fixed and concrete poured to build structures, people normally work close together in teams. Now, creating small teams with some physical distance could cut their productivity by 20 or 25 percent. But in the final stage of fitting out a building, the impact will be minimal.

Construction workers in masks on a Wellington building site, two days after work resumed in Level 3. Photo: Lynn Grieveson

Naylor Love, which celebrates its 110th anniversary this year, “entered the shutdown with high cash reserves and a strong balance sheet, and also high levels of staff engagement and low staff turnover,” Herd says. The privately-owned company has five primary shareholders, including the Naylor family. With eight offices in six regional centres, it says it is the only construction company with national coverage.

“We’ve managed to weather the lockdown. It was always a worry that the longer it went on the more it would eat into our cash and balance sheet. But we were quite comfortable working through the period of four to five weeks. But that won’t be the same for a lot of other construction companies and all the SMEs involved in subcontracting.”

“I've been in the game 47 years, and I’ve lived through lots of bad times, and good times and I’ve got a lot of scars on my back. I know how to manage things. I've seen what works and know what doesn't work. We’ve grown threefold in the last seven years, but successfully.”

Three fundamental policies have guided the company:

- “We don't bid a job unless we've got a top team to put the bid together, to do the estimating, to do the construction reporting, and to work out the methodology for the project.” Too often, particularly during the boom times of the past decade, construction companies got “very busy so they got their junior QSs [quantity surveyors] to put bids together, which is a disaster. And then they wonder why they lose money on the job when they get it.”

- “We don't bid a job unless we've got the right core people to deliver the job. A lot of companies just take on a job and then scramble around trying to find people to build it. That’s what happened with Fletchers. They took on all this work five or six years ago and just didn't have the people to build it. We knew that because we had the recruitment agencies ringing up our people all the time.”

- “We don’t sign a contract unless we know exactly what's in there and what the risks are. Over the last five years, 80 to 90 percent of our work we negotiated with our clients. We didn’t have to bid. They want us, because they know us. They trust us, and we won’t bite off more than we can chew.

“If you follow those three rules, you won’t get into too much trouble. We only make promises we can keep so that allows us to stay sustainable. The margins are not huge, but if you manage it properly and follow some basic policies like these, you can make a modest profit in this industry.

“But if you just grab anything and everything and not have the people to do the work, it’s a recipe for disaster.”

Given the spate of corporate failures in the sector in recent years, “there’s been a lot of publicity about unfair allocation of risks between the client and the contractor. But nobody forced those contractors to sign the contracts. They didn't recognise the risk or they had an over optimistic opinion of their ability to manage the risks.”

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