Blacktop receivership highlights construction margin issues
university-of-canterbury
Tue Sep 10 2013 12:00:00 GMT+1200 (New Zealand Standard Time)
Blacktop receivership highlights construction margin issues
Tuesday, 10 September 2013, 11:03 am
Press Release: University of Canterbury
Blacktop receivership highlights construction margin issues
September 10, 2013
The recent receivership of Blacktop Construction has served to highlight margin issues for construction companies, a University of Canterbury business expert says.
UC MBA director Tony Mortensen says the Auckland roading company was responsible for a number of major projects, including the resurfacing of the Auckland Harbour Bridge, a contract it had been involved with for several years.
Mortensen says other similar companies may face financial hardships in the coming months if contractors do not do their tender pricing homework.
``I think there is often too much emphasis on securing a contract and not always enough attention on ensuring that the tender will be profitable.
``What receiverships like Blacktop tell us is that companies are either not crunching the numbers correctly to start with or not building enough fat into their pricing to cover unforeseen events and changes in costs.
``Contract margins for standard construction jobs are getting thinner and therefore the only way to get a return on investment is often through economies of scale.
``This pushes contractors to trim pricing margins to get contracts that could help them achieve lower marginal costs and higher asset utilisation. This is not always successful and can often leave the company exposed.
``Sensitivity analysis is critical when quoting, factoring in changes in all critical costs and potential additional costs due to delays including debtor receipts and unforeseen events. Contractors also need to be careful they don’t drive prices down so low that no one makes any money. It’s the basic rule of plan for the worst and hope for the best.
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``While it might appear that the customers are benefitting from these highly competitive tender bids the fact is that no one wins when a contractor gets into financial difficulty. We learnt this yet again recently from Mainzeal.
``This might also act as a good warning for those involved in the tender selection process, in that the lowest bid is not always the best, nor the cheapest in the long run. Pricing is a science that needs critical attention by management and even more so in this highly competitive and still somewhat uncertain economic environment,’’ Mortensen says.
The two biggest drivers of construction growth in New Zealand are the rebuild of Christchurch and the continued positive population growth in Auckland.
Mortensen has produced a study of the New Zealand construction climate which has appeared in The Journal, published by the New Zealand Institute of Chartered Accountants.
ENDS
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