Houses under construction at Hobsonville Point. (Photo by Fiona Goodall/Getty Images).
Houses under construction at Hobsonville Point. (Photo by Fiona Goodall/Getty Images).

BusinessNovember 19, 2018

Why’s it so hard for builders to make money in a construction boom?

Houses under construction at Hobsonville Point. (Photo by Fiona Goodall/Getty Images).
Houses under construction at Hobsonville Point. (Photo by Fiona Goodall/Getty Images).

Kiwi builders have never been in hotter demand, but red tape is making it nearly impossible to get ahead. Alex Braae spoke to builders and bankers about the state of the construction industry. 

Willie Hewitt’s construction company, Westmoreland, is constantly flat out, but it’s never making any money. In the middle of housing boom he’s strapped for cash. This is what his last year has looked like as he goes about the business of putting up four small brick and tile units in the Auckland suburb of Orewa:

“The sections had old houses on them that have been removed, and we just want to build these four little units. On one of the sites, it turned out that Council had a stormwater drain running through the site, and it was deemed to be abandoned – Council records said that. The houses were designed around the premise that the stormwater drain wasn’t in use.

“So about six months ago, we were very close to getting the building consent, so we thought we’d start doing earthworks. We start doing that, and then we found out the stormwater line wasn’t actually abandoned, it was live. So the Council records were incorrect. And the problem was also that the line was broken in five places, and Council basically tells my client that they have to fix it, if they want to continue with the job. So you’d think that’s pretty easy, you just have to fix a pipe in the ground.”

And here’s where the story veers towards the Kafkaesque.

“Auckland Council deal with stormwater pipes, Watercare deal with sewer pipes. Because the stormwater pipe crosses over a sewer line, Watercare also has to be involved. So you now have an engineer at Watercare dealing with a sewer pipe, and an engineer at the Council dealing with the stormwater pipe. And my engineer has to deal with both of them. And when one engineer approves their line, then the other engineer still has to peer review the other accepted proposal, to make sure it doesn’t impact on their line. So now I’m paying three engineers, to figure out how to run a pipe through the ground. And all the while we’re still not building.”

Hewitt says if he’s lucky, the company will break even on the job.

Two cranes pierce the early morning mist in Auckland (Image: Getty Images).

An astonishing amount of building is going on in New Zealand at the moment. Cranes dot the skyline of Auckland, new subdivisions are springing up on the outskirts of every major city, the government is promising to deliver 100,000 houses through the KiwiBuild programme, and both skilled tradies and building materials are in desperately short supply.

For councils around the country this creates a surge in consent applications that must be processed. A recent report from consulting firm MartinJenkins found the Auckland Council’s building consents department was facing issues meeting demand, and a heavy workload was making it difficult to implement changes that would improve capability. They’re under an immense amount of pressure.

Hewitt says it sometimes seems like councils are dealing with that pressure by using procedural measures to delay consents, because their workload is so high. “They issue what are called RFIs – requests for further information – which is a legal loophole where they can make up any ridiculous question in the world, in order to stop the clock on the 21 days in which they have to legally process your plans.”

Auckland Council rejects the contention that it uses RFIs in this way. Ian McCormick, manager for building control, says that comprehensive and accurate applications wouldn’t be subject to RFIs. “RFIs are not used to gain processing time, they’re used when the detail needed to show a proposal meets the building code hasn’t been provided. In a perfect world we wouldn’t need them. RFIs clog our system, slow the process, and create follow up work for our busy department.” He adds that the council actively worked with applicants to reduce the chances of RFIs being needed.

Regardless, Auckland Council’s own figures show that the pace of consenting isn’t keeping up with demand for housing in the city. Nearly 13,000 dwellings were consented in the city in the year to September 2018, and the month-by-month trend is upwards. But this only brings consenting back up to pre-Global Financial Crisis levels, and is still short of what’s needed. The recent Housing Stocktake report found that by some estimates the cumulative shortfall of houses in Auckland over the last decade is as much as 45,000.

All of this is having a huge impact on Willie Hewitt’s business. While he is constantly busy, he is struggling to stay ahead financially. “We have $7.5 million worth of work that has been tied up in various councils, for as much as 12 months,” he says, which accounts for about half of Westmoreland’s turnover. They’re doing busy-work, rather than being busy with work.  

John Callaghan, a business manager at Kiwibank who has a history in the construction industry, says larger construction firms are particularly susceptible to cashflow problems from delayed consents. “If you’ve got a lot of staff and overheads, and they’ve got to wait and wait to get work done, then that has a bigger financial implication than a one or two man band. It definitely has an impact, and if you’re getting it happening on every job, it has a huge compounding effect.”

He says that means Kiwibank works with customers on a case-by-case basis, “at a relationship level”, to keep their businesses afloat. “It might mean that you need to provide them with working capital funding for a period of time, to see through those hurdles. Sometimes firms will find themselves in a position where they’ve got 20 jobs on the go, and 15 of them are held up in Council.”

Kāpiti Coast construction firm NZ Proud understands the need for a robust consent process, but is constantly managing long delays because of the drawn out process (Image: supplied).

There’s a widespread acknowledgement among builders that some of the consents and regulations are completely reasonable and justified. Nobody wants a return to the leaky building fiasco of the 90s. Johnnie Saunders, the director of Kāpiti Coast construction firm NZ Proud, says building standards are getting stricter, “and so they should be. They’ve been pretty loose for a long time.”

But he added that “the only problem is red tape. The consenting process is so long and drawn out and painful, because it’s so restrictive. It’s making things difficult time frame-wise, and you’re not going to be able to build quickly. You have to wait for plans, engineering and consent. But it needed to happen, because we needed to make sure quality construction was the focus, because we’ve had so many issues with it over the last few decades.”  

Willie Hewitt has considered changing the way his company structures contracts to deal with the situation. At the moment, he charges customers a fixed price for a build, but he wonders if a better way of doing it would be to build houses at cost, and then charge by the hour for his company’s administrative work. “If we were just sending out invoices to our clients on a weekly basis for the administrative side of building their house, we’d probably be more profitable, compared to just building the houses.”

And while he also accepts that some of the hoops he has to jump through with Council are reasonable, he just wants to get on with actually building. And he warns that if things don’t improve, more firms will find themselves in financial difficulty.

“It’ll start happening more and more to the smaller guys, because while there’s so much work out there, nobody’s making a dollar out of it.”

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Mad Chapman, Editor
The Spinoff has covered the news that matters in 2021, most recently the delta outbreak. Help us continue this coverage, and so much more, by supporting The Spinoff Members.Madeleine Chapman, EditorJoin Members

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