Why our construction industry is broken, and how it can be rebuilt

For Auckland is a new Spinoff podcast of civic conversations with people working to create and sustain a better Auckland for all. In episode three host Timothy Giles spoke to Mark Spencer about how to build a construction sector that can build a world-class city.

On Sunday the government announced an agreement with the construction industry designed to mutually help each other sort their mess out.

The sector certainly needs improvement. Industry leader Mainzeal Property and Construction collapsed in 2013 owing $110 million and the effects are still being felt. The latest failure, Eberts Construction liquidated in August last year leaving debts that have grown to $108 million.

To help explain the issues the struggling sector is facing, and how to chart a way forward Mark Spencer, global director buildings for Beca and Committee for Auckland co-chair, joins our latest For Auckland podcast.

Spencer is an engineer who has worked his whole career in one of New Zealand’s construction success stories, Beca – a 3000-employee company that works across the South Pacific and Southeast Asia, with a fledgling presence in Europe. Spencer oversees Beca’s building practices in New Zealand, Australia, Myanmar, Singapore, Thailand, Indonesia and Europe, giving him a unique perspective from which to explain the challenges and opportunity for the construction industry to make Auckland into a world-class city. He believes New Zealand has unique characteristics to make a robust and healthy future achievable. For once, our lack of size is an asset – but only if the whole sector raises its aspirations and radically changes its behaviour.

Listen to episode three of For Auckland on the player below, subscribe on iTunes, download this episode (right click and save) or read on for a full transcript of the conversation. For Auckland is brought to you by the Committee for Auckland and produced by The Spinoff.

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Timothy: You’re hugely involved in the construction sector as group director, buildings, at Beca. I’ll ask you a little bit about Beca in a moment Because they’re a significant entity in themselves – but buildings, construction, that sector is so broken isn’t it?

Mark Spencer: Well there is certainly a lot of rhetoric in the media currently and commentary from industry participants, which would suggest it’s got its share of challenges and it certainly does. I think ‘broken’ might be going a step too far but when we’ve seen some of the really large players either exit the market ceasing their involvement in things like vertical construction, or obviously some fairly notable failures over the last few years, it’s certainly not in the sort of health we’d like to see.

The reason I want to talk with you about this in For Auckland is the way we build our city really matters, right? And when companies go down to what, Mainzeal went down big, big time, and people got burnt by that, and then we’ve got a problem where building slows down… we’ve got this housing crisis etc etc.. And then what? Eberts went down. Who were the multiplex that was a crash in New Zealand?

Multiplex was a decision to exit the New Zealand market a few years ago. Yeah.

What is it, what does it mean, ‘exit the New Zealand market’?

Oh well, they’re an overseas company so they’ve retrenched back to their origins in Australia. But yeah, given that uncertainty in terms of the sort of firms that can take on the really large projects that we’re wanting to build in Auckland at the moment it’s a pretty short list. You very quickly get past a few tier one players and you’re into, in many cases, firms that are just privately held so that, that actually means you’ve got quite a vulnerable industry at a time of a hot market Because you actually tend to see more failures occur when the market is booming than when it sort of busts.

That doesn’t make sense to me.

Yeah well, if you think about it for a moment, it probably can Because the demands on capital become more acute when you’re in a growth phase, of course, as they would for any business.

So when you say privately held that means that it…

Often it’s a family that owns the business.

Right. So they don’t have millions of dollars on reserves sitting there like a big player would do?

That’s right, yeah. And Fletchers of course have been much publicised around the travails they’ve had on a number of significant projects and you’d have to say their survival has only been possible, Because they’re actually part of a larger parent organisation. If it was a stand-alone construction company, it’s hard to imagine they would still be there.

So we’ve got to…

You know that’s our largest constructor in New Zealand.

And as I understand it, and again I learn from not necessarily credible sources, which is why I need to have this conversation with you. Fletchers, in order to survive have said ‘we’re not we’re not building anything’. But they were the go-to for big construction.

I would agree. I think they chose their words quite carefully, it was ‘we’re out of vertical construction until conditions improve’ as it were. So they’ve certainly picked up on the fact that some of the contract conditions, that the sort of transfer of risk, perhaps disproportionately across to the contractor is, it’s just not a place they’re prepared to play Because the margins for those firms are quite, quite tight.

So that’s big dollar amounts but quite small…

Quite slender margins. Yes. So when you start getting a disproportionate amount of risk transferred across it, it just ceases to make commercial sense to be in the game.

So why do we shift the risk across? Can’t we put the risk somewhere else? Is there an answer or is this just going to keep happening? Have the pressures that led to a big multiplex, a big international player saying now we’re out we’re not even gonna play in this market, and then others crash, and people’s dreams and livelihood get lost and you know constructions have frozen? Has anything changed or other pressures that made it so unstable and risky still there?

I think they are, but there’s, there is uncertainty particularly I suppose in the current environment where it’s, it’s arguably capacity constrained and maybe we’re all our own worst enemies, those of us that play in this particular sector. But I do get the sense that you’ve had a number of firms turn around now and say, ‘you know, under those ters, we’re not prepared to play anymore.’ You know, taking Fletchers as the example there. So that has, in effect, I suppose, that becomes difficult to ignore. So we’ve had several instances where large projects have come out for tender and they haven’t been able to assemble a credible list. You know you’ve had what was intended to be a competitive tendering process and only one person prepared to tender to the job. So they’ve had to fundamentally change I suppose, what the procurement process is going to be on some of those projects.

And so this is happening as a function of market conditions. How do we, how do we get to the point where more people come back in and create options? Because, if we’ve got only so many people, or really limited number of people who will do the work, it limits the creativity, it limits the opportunities of building something great.

I’m glad you mentioned we’d like creativity, Because if you end up with very onerous contract conditions, one of the things that will tend to do is suppress innovation. Why would I innovate if you’re going to push all the risk of innovating onto me? So that kind of fundamental principle of getting risk fairly shared between the parties. The people that are going to benefit from such innovation should be participating in the risk, not seeking to sheet it home to another party. I don’t want to make this sort of a legal discussion, Because there’s plenty that are better qualified than me to talk about those aspects, but there is something about getting the underlying contractual frameworks right, so that you do get the outcomes you’re seeking. I’ve been fortunate I suppose, in the company that I work for we span a number of different sectors. I’ve always been intrigued by things like an alliancing, which you see in the horizontal infrastructure space.

So you’ve talked horizontal and vertical. So vertical’s building?

Vertical’s buildings essentially, horizontal is bridges, tunnels, major projects…

Things I tend to think of as infrastructural.

Yes. Yeah I’m a bit like you. I tend to use those more historical terms but these days people seem to have settled on horizontal vertical. To you, yeah, buildings and infrastructure.

I’m in the in crowd. That’s good yeah. Alliancing.

Alliancing, yeah. So that’s where there’s a bit of effort and some would argue, perhaps some additional cost goes into coming up with what the estimate of the project cost is going to be. But you’ve got to get effectively an incentivised model where there’s a, there’s a sharing of the benefits between the contractor and the client and other project participants such as design organisations that are part of the mix as well. Everybody shares in the win if you like, if it comes in below the target cost. But the client will pay, for them, there’s perhaps a perception that it’s sort of uncapped Because they will pay whatever it costs. But it is done in such a way that you’d argue that is a fair cost. So the contractor does not risk it all, other than margin, if the project costs more than everybody thought at the outset.

Here’s what I want to point out that happened when I saw Mainzeal go down. I play a very poor standard of football and cricket at a very low level. Mates of mine who played in the same club, who were subbies, they got really badly burnt. And it looked to me like the big cats kept their knighthoods. So when we’re talking about risk going inappropriately that’s kind of where I’ve seen it land.

Well, it’s a good point actually Giles, something I did mention earlier, that most of what we refer to as the big contractors don’t employ a lot of direct labour anymore, they are really managing the whole exercise and that’s not to be underestimated the complexity of doing that. Projects have become in many cases larger, infinitely more complex, Because of I suppose, we now use a whole lot of imported materials in, in addition to what even might be available locally. So the number of permutations you can get within a building just by virtue of the number of different materials that can come into the mix, you know, it can make managing the undertaking a significant exercise in its own right. But by then yes, the bulk of the physical activity occurring on site, the materials that are coming in, that is through a large number of sub-contractors. So I don’t actually have the statistics at my fingertips but I suspect that a number of players on a project these days are significantly greater than it used to be.

So pretend for a moment that I am profoundly ignorant of the construction sector. If you can possibly imagine that. When you talk about sharing of risk across the players, who are the players? You’ve talked about a client, we’ve talked about the…

Design consultants. Yes.

Yes, so what, we’re talking architects, we’re talking who else designed it?

Engineers and of course there’s a huge number of disciplines that fall underneath that. There are people taking responsibility for specifying and in some cases designing the facade.

There are geotechnical engineers structural engineers.

More and more. Right?

Yeah, there’s fire engineers, security consultants, MEP: mechanical and electrical plumbing.

Thank you for explaining that.

The list goes on. So that’s that’s just in the consultant team, quantity surveyors who are assisting the client with coming up with the project estimate and cost control on the project overall. Project managers often in the mix that are perhaps assuming responsibilities around putting the procurement plan in place, in conjunction with their client, through to design management activities or sometimes that falls to one of the consultant parties. So that’s just before we get a set of documents perhaps to think about going out for tender to the contractors. And then we’ve got the regulatory services as well, so you’ve got Council coming into the mix, needing to try and ensure that the design complies with New Zealand regulations.

And in Auckland the Unitary Plan within that context. Right?

Yeah I suppose that’s more in the resource consent space as opposed to where I play traditionally, which is in the getting building consent.

Okay. So many moving parts already and then there’s the funder, the bank, usually they’re involved, there’s an insurer involved. I mean, are these all people? What I’m trying to explore, is when you talk about sharing risk better Because we’ve seen when the risk got loaded, people have crashed and we’ve ended up with a really fragile sector which we need to be robust, so does risks sit with them as well?

With those other parties?

Yeah.

Well and I think we’ve seen some perhaps even more dramatic examples of some of those outcomes in Australia just recently…

So hang on Auckland is not the worst?

I would argue perhaps not, so our firm is active in the Australian market as well and…

Just before you… I did say I would get a bit of an explanation from what Beca is, Because Beca is a sizable player. Could you just explain what Beca is in this sector?

A multi-disciplinary professional services firm is the sort of boring sounding description. So about three and a half thousand employees, employee-owned organisation. So we’ve started to be a bit unique in that regard. Many of the other consultancies operating here in New Zealand at scale would be large overseas and frequently, publicly owned organisations. And we’re really throughout the South Pacific and Southeast Asia. My own responsibilities extend to our practices in New Zealand, Australia, Myanmar, Singapore, Thailand, Indonesia and we have a little off-shoot of activity up in Europe as well so the firm itself has really organised into five major groups: industrial, infrastructure, transport and infrastructure, buildings which I look after, utilities and advisory services, which houses people like project managers, our software engineering team that do a lot of work in the defence sector. So architects, our planners etc. So we cover largely, the full spectrum I think, with the exception probably of facade engineering and acoustics.

You are New Zealand headquartered and owned by your employees. So is New Zealand 90% of you, of the work?

Of the work?

Of your income.

Oh yeah. Of the three and a half thousand employees we have worldwide we’re probably about, I should know these better numbers better, but I think roughly 2000 New Zealand, say probably two-thirds here and a third offshore.

And most of your money is made in New Zealand?

Most of our money’s made… It’s proportional to that distribution of staff. So it’s reasonably sized enterprise in places like Thailand, Singapore and Australia.

Okay. So I would suggest, my experience sitting inside Auckland is to go ‘man it’s a bit broken’ and I’m assuming that we’re the most broke in construction but you are arguing not.

No. I think places like Australia would be regarded as having a more commercially adversarial framework that they’re operating within. So we’ve heard for example that some of the large sort of global player insurance companies are really not terribly interested in providing things like project insurance in a place like Australia just Because the whole situation has become so fraught and it’s almost been viewed as another source of income on a project from the outset, is to tap into various parties’ insurance. There’s that sort of positioning occurring right from the outset of a project which I just find very offensive I suppose. It’s to be there for circumstances beyond everybody’s control if you like, or if a party has performed particularly poorly and needs to be held to account for that, but it just doesn’t feel like that. These are enormously complex undertakings and it’s very difficult to do that in an environment where the parties aren’t actually actively working with each other together to try and get the best outcome.

So hence that idea of, we create a sector practice where everyone gains from the win and everyone shares in the shortfalls or the low delivery run loss? Yeah okay.

I suppose, just to talk to that point, I think we do have examples of, there are exemplars if you like in the New Zealand marketplace. So a couple of clients that we work with quite closely when it comes to mind in my sector would be the University of Auckland where their head of estates or head of property recognises that he’s wanting to continue to do projects year on year and is reliant on a vibrant resilient construction sector as part of his supply chain to put the projects he wants in place.

So how does that affect his behaviour?

You just see a much more mature attitude to things like allocating risk. He will invest up front to get better quality documentation. The project is better defined at the point in time where it goes to tender. So people are operating with a whole lot less unknowns. NZTA would be another example of an organisation that invests a lot of time and effort in trying to put best practices in place that are going to yield those superior outcomes Because again they’ve got, they’ve got to do projects year on year. They’re not, they’re not just here to do one project and scheme for all of the profit.

They’re interested in long-term sector health.

So we can do better? We’re not stuck with the problems that we have had in the last few years?

I’d like to think not. One of the things I constantly reflect on is, is what’s different about New Zealand? And the reality is we talk about it as a village. Some people would refer to as a village. Now barely two degrees of separation. Perhaps at times in negative terms. I’m the sort of optimist I suppose, that tends to view it from what are the positive from those attributes? And what I think is, you’d barely need to get twenty people in a room, maybe it’s a few more than that, but some key industry players and just decide almost overnight well we’re going to work together to make it better. I think it’s very, very difficult to do in large economies like the US or even Australia, where the industry is very fractured. Here you have some significant players. I think with the interests of the country at heart really Because they’re all significant sort of corporate citizens of New Zealand, that would be prepared to come together and think about right, how we’re going to make it better and you’re not going to get hundreds and hundreds of people involved in that conversation.

Which ties me then into your Committee for Auckland co-chair role. You’re not paid for that. I mean, I’ve just got my head around the size of the job that you have and watching you listing off the number of countries that you’re responsible for in your area. You’re busy. Why would you bother spending time with something that doesn’t pay you, that is about being in service of a city and making it better for all? Why?

Why wouldn’t you? I suppose I feel guilty in some respects that perhaps I haven’t done more in the past years. I remember having a conversation with you once before where I described, you can sort of climb into your car, have the carriage door go up, drive to the office, have the garage door go up, go in there and sort of sit in your little ivory tower all day long and repeat the rest of the days of the year.

Sounds quite comfy and it’s a nice car. What’s wrong with it?

Well I just think it’s it’s not becoming sufficiently engaged in what’s going on in the place you are where your family’s going to grow up and perhaps these following you. So just like many people in Auckland, I feel it’s good being a great place to be. Just by sheer good luck, I suppose that the family chose to emigrate. My parents were the ones that immigrated here from overseas and chose Auckland. What an incredible city. I love the travel that I do overseas but there’s nothing like coming into land over Auckland and getting a view of our harbour and the city and thinking they should be able to be the best place in the world.

How are we tracking on that?

Yeah, not as well as we could. I know in this podcast series you’re going to be talking with a lot of people covering a variety of topics beyond this one, but I love the fact that, and it’s sort of the same one I have about the company I work for too, it’s so successful but has the capacity and potential to be so much more as well. And that’s sort of quite inspiring, the thought that it’s that good but it can be infinitely better.

Where would you like to see it get better? In the last couple of minutes of this conversation and thank you for scolding me about the construction sector and now putting a broader context on where’s Auckland’s shortfall that you would like to see improvement.

Oh, maybe I’ll just confine it to the topic area we are talking about in some depth here today and that is one of the things I’m, for my part of the business I’m interested in, in really putting quality buildings in place. That doesn’t mean that we have to be doing absolutely spectacular structures. It could be a utility building of some sort, but I would want utility building when you think of the stack, the ventilation stack for Victoria Park. Yeah, that could have just been a big ugly block of concrete. But, the decision was made to bring an architect on board and get something that I think, is quite a spectacular, sculptural feature. It’s taking the trouble I suppose, constantly, to think about how do we make this the very best it can be?

I think there are some disappointing outcomes in the city at the moment. If you drive around often, I’d have to say I made this observation even in Sydney last week, when I looked out the window of our office, the best building I could see was a hundred years old. The most attractive building was a hundred years old. And I think Sydney is blessed with a lot of those fabulous sandstone buildings. And that’s not to say there haven’t been some great modern buildings added to the landscape recently, but we’ve got a long way to go I think, to get them to raise the bar more generally across our building stock. There are standout examples but not sufficient numbers of them at this stage. I’d like to see us aspiring to a much, much richer and attractive central business district to start with. But I think the argument applies across the city. One example I can think of that we’ve been involved in recently that the team is immensely proud of would be something like Manukau bus station, and what I was enormously gratified to observe there, was that the building, sort of was being put to an additional purpose, that was serving as a homeless shelter in the evening and that, to me, just seems like a fantastic outcome. To see that building, being a great building, if you like worked hard, so it’s then maximised the benefit that it’s yielding to that community.

Are you suggesting to me that buildings are about people?

It just might be. Well, I think the whole urban fabric is, yes.

The whole urban fabric is?

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About people. We’re about creating a place for people.

It’s been a fascinating conversation and what would a takeaway be if we’re going to look at, for me, that for me actually, that is my take away, is a hundred years ago we were building some buildings that are beautiful and have remained functional. And then you just defined to me utility, really powerfully Because I didn’t know what a utility building was. And then you’ve actually demonstrated both, in the utility of a bus station, but it has utility for people who need shelter. Right? And those are my takeaways. Is this something you would leave me to think about, or how can I make a difference? What else might I be pondering or thinking on?

I think just to raise our expectations that’s what we want. We want a hugely attractive city. And I suppose thinking back to some of what the Committee for Auckland’s about, it has some of those themes around wanting to be a great ancestor. I’ve always loved that line that some in the committee have talked about, some of the founders have talked about being a great ancestor. So we’re putting something in place that our descendants are going to be proud of some of the decisions we took in. That’s it for me.

It’s been a great and a very civic conversation for Auckland Mark, thank you. This series is hosted by the Spinoff and Committee for Auckland to generate dialogue so do subscribe please and listen but get in touch. Contribute to the dialogue and the conversation and shape this.


For Auckland is a new Spinoff podcast of civic conversations with people working to create and sustain a better Auckland for all. Hosted by Timothy Giles of the Committee for Auckland, produced by The Spinoff.

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