Builders bidding for work on razor-thin margins: BDO survey finds two-camp sector

Industry now in two camps, BDO says. Photo/Nick Reed

Building businesses are bidding for construction jobs on razor-thin margins as low as 6 per cent, according to a survey out today.

James McQueen, national construction and real estate leader at BDO's Auckland office, said such knife-edge margins meant builders either suffered losses or made extremely slim profits.

"On a 6 per cent margin, you might have overheads of 4 per cent and the net profit might only be 1 per cent," McQueen said, commenting on the BDO 2019 Construction Survey Report.

The industry was now divided into two camps, he said.

"There are the good operators with robust businesses and those that are fragile and susceptible to failure through bonding, cash, resources and other significant constraints," McQueen said.

But he takes heart from a drop in the number of firms bidding at such low rates. The number of head contractors bidding at margins of 6 per cent and below has dropped but McQueen said was "still too many".

"For them, the race to the bottom seems to be continuing," McQueen said of the low-bidding contractors.

Subcontractors earning margins of 20 per cent or less had reduced from 78 per cent to 53 per cent in the two years BDO's survey has been running.

The survey got answers from 220 businesses on topics including growth, capacity, forward work, concerns, the threat of insolvency, cash flow challenges, retentions, disputes, gross profits, subcontractor margins, staff, succession planning, shareholder agreements, insurance and sustainability.

On disputes, the survey found 60 per cent of those who answered had nil or minor disputes, 22 per cent had disputes of up to $99,000 and 12 per cent had disputes of up to $500,000.

The survey noted: "As we have seen with the high-profile collapses over the last couple of years, an unreasonable contract dispute has an immediate and massive impact on cashflow and can often be fatal to the business."

The Herald has reported this month on how the Christchurch branch of contractors JFC is closing due to lack of work in Canterbury, although the Auckland office remains viable and will stay open, a representative said.

National builder Ebert Construction went into receivership last year with claims of $108 million.

Arrow International had around 450 staff and annual revenues of more than $350m but this year, it went into voluntary administration and is now in liquidation.

Last year, Orange-H Group - the McConnell entity set up to run down the residual Hawkins assets after the sale to Downer Group - went into receivership just 10 days after being ordered to pay $13.4m over a leaky school.

Canam Construction left an Alexandra Park apartment job and litigation has ensued over that. Corbel Construction has left the Parnell Terraces leaky townhouse buildings in Auckland.

Last year, it was announced that a troubled Fletcher Building unit would lose almost a $1 billion in a two-year period due to difficult construction contracts. Losses were recorded in the Buildings + Interiors division of $292m in the June 30, 2017 year but a further $660m of losses were projected in the current June, 2018 year.