Source: Radio New Zealand
Supplied/ Unsplash – Josh Olalde
The inflationary effects of higher oil prices is already being felt in the construction sector.
The industry is still licking its wounds after a lengthy downturn and while recent economic growth numbers suggest there is a gentle recovery underway in residential, commercial construction has yet to really take flight.
Apollo Projects executive director Paul Lloyd said his company has had a positive 12 months, but there’s sector-wide concern that projects in the pipeline could be put on hold. Cost increases are already weighing on firms.
“I’ve already seen, for one of the materials we buy, a 30 percent increase coming through for something that is both freighted and made from a base product of oil and and this is where it’s going to get really messy,” he said.
“Even drainage pipe is oil-based, it involves a lot of heating and production. So that’ll start to move. It’s pretty much everywhere, isn’t it?
“Even a 2 or 3 or 4 percent increase overall, that can be the margin of a project, and then all of a sudden you’ve got contractors, and there’s subcontractors, and the whole pyramid starts to topple – it doesn’t do anyone any good when that happens.”
Cost pressures a drag on an already-strained sector
Construction sector leader at advisory firm BDO, Nick Innes-Jones said head contractors are likely not as well-prepared as they might have been in the past to endure an economic shock of this magnitude.
“We’ve come up off a lower base over the last couple of years,” he said.
“It’s pretty tough and it’s going to get tougher and tougher because, the activity slows down and having come off slower years, they might not just have that balance sheet to get them through that tougher period.”
Innes-Jones said subcontractors in particular are vulnerable.
“They’re obviously getting more squeezed on margin and if the industry then also slows down, I think there’ll be many out there that will not be able to see it through, especially if the Middle East war is prolonged.”
Risk tossed around like a hot potato
“Historically, clients and lawyers – they want to take the risk away and put it onto the contractor, because that’s what we should be good at, but it gets to a point you simply can’t,” Lloyd said.
“And so it’s going to be really interesting to see how teams negotiate contracts to fairly split risk.”
Lloyd said if demand does slow or projects are put on hold, there is a risk contractors will drop their prices in an attempt to keep busy, but that benefits no one.
“You’ll put a price in for a tender today, you may not engage one of those subcontractors for six months, and while they gave you a price when you tendered, they’ll go, ‘look, it’s no longer relevant,’ and it could be 20 percent higher.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
