Focus on lowest cost undermining major infrastructure projects

Connecting New Zealand

Focus on lowest cost undermining major infrastructure projects

01 Aug 2018

The construction industry is under strain to build a record amount of infrastructure on thin margins, but issues in the procurement phase could destabilise the construction industry and set these large-scale projects up to fail.

Results from the 2018 Construction Industry Survey, a joint research project commissioned by Teletrac Navman and Civil Contractors New Zealand (CCNZ) and conducted by Colmar Brunton, revealed a focus on lowest cost is having a high impact on contractors. The issues start in the procurement process which, the survey signals, needs to be improved dramatically.

• Nine out of 10 (93 per cent) respondents from large businesses (51+ employees) believe a poor procurement process usually affects the entire project adversely.
• The top three issues for construction companies in the procurement phase are client focus on lowest price (81 per cent high to very high impact), cut price bidding by contractors (76 per cent), and a lack of visibility of future work (75 per cent).
• Eighty-one per cent of respondents from large businesses don’t believe clients have sufficient understanding of procurement in the construction industry.

“With record levels of investment proposed in the recent Government Policy Statement on Land Transport, there needs to be more focus on whole-of-life value for projects to ensure a sustainable industry,” says Peter Silcock, Chief Executive at CCNZ.

“Razor thin margins are risky for both the public and the industry. Cutting costs leads to poor-quality infrastructure, and if contractors are forced into a bidding war on cost as oppose to outcomes, this will destabilise the New Zealand construction industry, which is already operating on slim margins.

“Large-scale builds are intended to serve generations of New Zealanders. Taking a lowest-cost approach to these projects will simply add maintenance and remediation costs down the line.”

The results indicate several areas for improvement based around better collaboration between clients and contractors, and more education on the costs and whole life value of projects. Eighty per cent of respondents said a shared understanding between contractors and clients about the fair allocation of risk would be a major contributor to improving procurement.

Respondents also recognised technology and education have a strong part to play in stabilising the industry and contributing to high-quality infrastructure. Construction firms are taking steps to better manage risks with four out of five businesses (79 per cent) up-skilling staff and around two thirds (57 per cent) of large businesses using technology to track and gain insight into costs.

“What’s not clear is whether cut-price bidding is intentional or not. In some cases, firms may not have an accurate understanding of the contributing costs, so are committing to projects that turn out unprofitable down the line,” says Jim French, Construction Industry Specialist at Teletrac Navman.

“Clients should be looking for contractors that have a thorough understanding of project costs and risks – not just picking proposals based on price alone. Job site and measurement technology can play a large part in understanding the total cost of a project and communicating this to clients. Resilient firms can then develop rich historical data, build accurately priced proposals and stay on track during construction.”

Presented at the CCNZ annual conference in Hamilton, the survey garnered responses from business leaders and managers within the construction industry. The survey gauges attitudes on a wide range of issues including current events, regulations, staff and skills, job site technology and procurement.

The 2018 Construction Industry Survey is available to download at www.teletracnavman.co.nz/construction-industry-survey, and in the members’ section of the Civil Contractors New Zealand website.

Survey methodology
The 2018 Construction Industry Survey is an online survey that sampled 159 adults within the New Zealand construction industry. The survey was commissioned by Teletrac Navman and produced by research firm Colmar Brunton. Margin of error for the total sample is + or – 7.8 percent at a 95 percent confidence level. Data was collected from 23 May – 6 June 2018 by Colmar Brunton.