The Bust Cycle

An interesting article came out recently from Stuff reporter Geraden Cann on what industry players, including the Master Builders Association, are calling the "bust cycle" in the construction industry.

The article alludes to the fact that the Ministry of Business, Innovation and Employment (MBIE) has recorded 183 construction companies going bust between the start of August 2022 and January 2023. 

However, contrary to this, MBIE's 2022 State of the Building and Construction Sector report found that "three-quarters of business owners or managers were confident their business would still be operating in two years, with most having plenty of work for the next year".

Some of the reasons highlighted for the increased number of liquidations recently include: 

• Easy credit from the Covid era drying up
• Cost of materials increasing
• Shortage of skilled labour meaning not only labour shortages within the industry but projects getting behind schedule

Cann's article quotes Norling Law Director Brent Norling as saying, "Often businesses are failing through no real fault of their own. Before the 2019 pandemic, failure was often due to the incompetence of the directors or senior staff. Post-2019 and 2020 onwards, with everything that has happened with Covid and all the downstream effects of that, often businesses are failing through no real fault of their own".

A recent example of this is the voluntary liquidation of long-time Manawatu steel fabricators Stevensons Structural Engineers. Stevensons had its origins in the late 1800s and has been part of the Manawatu fabric ever since. Projects they have been part of include the building of the Beehive, Te Papa and, more recently, the wind farms above Manawatu. 

Their contribution to the Manawatu community has been huge, sponsoring many local organisations and providing secure employment for over 70 Manawatu staff and their families.

Their demise will have a compounding effect on many construction companies who rely on Stevensons for their products, showing the fragile symbiotic relationship between manufacturers and construction firms. Again, the failure of the company, due to contractual obligations they had with their clients not being honoured, had a downstream effect. 

As owner and managing director Evan Kroll said, "as a company, we did nothing wrong. They cannot fault our product or our service, or anything like that".

On a more positive note, Norling believes the IRD are a lot more generous towards companies that are having financial problems than they have been in the past. He does warn, however, that there is a risk of "moral hazard" sneaking into the industry, as more builders and companies put off paying their tax because they know there could be leniency later on. 

"In essence, IRD's willingness to compromise risks incentivising bad behaviour", Norling warns.

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