SkyCity fire is 85% burned through with crews using cranes to assess fire and damage.
Video / Michael Graig / Mark Graham / Cameron Pitney
Fletcher Building is stumping up an extra $150 million to complete its problem-plagued NZ International Convention Centre and hotel project in central Auckland, to complete it by 2025 or possibly sooner.
“Despite good progress on site, the complexity of the rebuild means costs are now expected to exceed insurance proceeds on NZICC.” the NZX-listed company said in an update to the market this morning.
The construction site caught fire in October 2019, and extensive remediation had almost been completed, with the project set to be done in 2025.
“All demolition work is complete, remediation of the steelwork is well advanced, roof installation has commenced, and the first two car park levels are now completed and expected to be handed over to the client, SkyCity, later this month,” Fletcher Building said.
“Based on this progress, Fletcher Building continues to expect that the NZICC project will be completed in early 2025 or better.”
The fire response caused extensive water damage and mould throughout the International Convention Centre site. Photo / Supplied Fire and Emergency NZ
However, extensive water damage and mould on the site from the fire response, and more resources needed to fix it, had blown costs out further, above what the $336m insurance payout would cover.
The inflated cost of labour and building materials was also cited as a factor.
“Insurances that were put in place on the project had not envisaged the combination of the rebuild complexity, earlier Covid delays, and cost escalations that have been experienced.”
Previous guidance from the company said the project would cost $750m. Friday’s update would take the total cost to $900m.
Jarden analyst Grant Swanepoel said another cost blowout was a “big surprise”, because it was his understanding that the insurance payout would cover any additional costs.
“This is quite left field and $150m is quite a big number,” Swanepoel said.
“We were being told insurance was going to cover the differential left to go.”
He said Fletcher had underestimated the total cost of the complicated clean-up, so the insurance payout fell short.
“They’ve spent millions and millions up to this point; we just thought it had been fully captured by the provisions up to this point, but there was a miss on it.”
Complexity was added by the mix of reasons for the cost overrun, which included inflationary problems, separate to the fire damage.
“Even if didn’t have the fire, they would have had a cost blowout,” Swanepoel said.
The extra $150m in provisions by Fletcher Building included the cost of remediating water damage, and inflated labour and building materials costs. Photo / Fire & Emergency NZ.
The extra $150m provision would be added as a significant item in the company’s half year financial statement for 2023, so excluded from its total earnings, maintaining its expected annual earnings target of $855 million or more.
Fletcher chief executive Ross Taylor said that accounting treatment was due to the project being part of the vertical building sector, which the group had discontinued operations in.
“It is disappointing we require further provisions, which are the result of the significant complexity of the project rebuild.
“However, NZICC is Fletcher Construction’s last project in the vertical sector, as a decision to fully exit this sector was made in 2021.” Taylor said in the market update.
The cash impact would would not be immediate and would flow though the 2023 and 2024 calendar years.
“Our balance sheet continues to be in a strong position,” Taylor said.
In June, Fletcher Construction confirmed legal proceedings were being taken over insurance for works at the convention centre.
“Proceedings have been initiated in relation to a difference of interpretation over an insurance policy, as it applies to the New Zealand International Convention Centre project. It is not appropriate for any parties to make further comment,” the company said.
The Herald reported in 2020 that more than 80 per cent of the cover was held by American insurance giant Chubb, with the rest held by Australia’s second-largest insurer, QBE, and Warren Buffett’s Berkshire Hathaway.
