FINANCE

Industry 'Marginally Better' But Still A Race To The Bottom

Friday 28 June 2019, 4:46PM
By Beckie Wright
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Leading Accounting & Advisory firm BDO has undertaken its second annual Construction Survey and will release the Survey Report on Wednesday 26th June at an event in Auckland.  

Key 2019 Survey Report Findings

The 2019 Report identifies both positive developments and concerning trends:

  • There has been an improvement in gross profit margins

    The 2018 survey showed that 54% of head contractors were missing out on winning projects at margins 6% and below which is not sustainable for those companies.  Those winning projects at those low margin levels have now dropped to 35% of companies, which is still too many.  For them, the race to the bottom seems to be continuing.  The proportion achieving margins over 8% has increased from 28% to 42%.

    The improvement has flowed through to subcontractors too with those earning a margin below 20% reducing from 78% to 53%.  This trend is reassuring from the perspective of survival of the sub trades, as one of the greatest challenges for everyone is the availability of companies and people to do the physical work.
     
  • Cash flow is becoming a greater challenge

    1/3 of respondents indicated that cash flow was becoming a greater challenge for them. Bank Performance Bond security and the retentions regime are tying up additional cash resources that the industry needs. 1 in 5 found getting paid in time was a big issue for them. Margins are insufficient to quickly resolve these challenges.
     
  • The Industry is getting to grips with the retentions regime

    Encouragingly, only 7% ‘prefer not to confirm’ they are complying with the retentions regime compared to 28% last year but of those few that actually inspect that their retentions are being held in trust, nearly ½ found instances of non-compliance.
     
  • Ability to provide performance bonds a significant restraint to growth

    Only 53% of those that provide bonds have capacity to issue new bonds before existing bonds are released. 
     
  • Recent high profile insolvencies have had a noticeable effect on how respondents are running their business

    A number of the actions being taken to protect businesses from these risks are outlined in the BDO Construction Survey 2019 report.
     
  • Sustainability a ‘nice to have’ rather than a reality

    The overwhelming response was that clients wanted to be sustainable but were not prepared to pay for it.
     
  • Many businesses do not have a succession plan

    Only 1/2 of those surveyed that were over 50 had made progress on a succession or exit plan, presenting a huge risk to the industry.
     
  • Management Reporting

    43% of survey respondents find their management reporting to be limited or lacking.  Given the pressures on margins and cash flow, accurate reporting is a fundamental prerequisite to a sound business.
     
  • Forward work is feast or famine

    There are mixed messages in relation to forward work.  While the industry as a whole is forecast to continue to grow our analysis of forward work indicates that overall there is less forward work than a year ago. It seems to be feast or famine with the South Island showing greater signs of weakness.

 

James MacQueen, Head of BDO’s Construction & Real Estate commented on the Survey Report findings,

Factors such as the capacity to provide performance bonds are separating the construction industry into 2 segments, the good operators with robust businesses and those that are fragile and susceptible to failure through bonding, cash, resources and other significant constraints.

At many levels and ways there is still too much pressure on lowest cost irrespective of the consequences.  It is apparent that more people now realise the folly of this but there always seems to be someone desperate enough to go lower than is sensible and take risks others avoid in the mistaken belief they can stay in business indefinitely.

He continued,

The sector as a whole continues to grow and forecasts of future projects support the opportunity for further growth.  However in addition to the issues identified above there are other significant industry-wide challenges with respondents particularly concerned about staff issues, bureaucracy, the economy and future workflow.

ENDS

For further information please contact

Lucy Nichols
BDO National Marketing Manager
Direct: +64 9 366 8055
Mobile: +64 21 800 262
lucy.nichols@bdo.co.nz