by Stuart Tucker General Manager of Civil Infrastructure at Beca
Stuart Tucker explains a clear trend showing increased
demand in the infrastructure construction sector for the next couple of years and what this means for contractors.
THE ONSET OF THE NEW year is traditionally a time for reviewing the achievements of the past year and looking to the opportunities in the coming 12 months. For me personally, seeing Alice breakthrough at Waterview was a major accomplishment in 2015, both for those involved and for the industry at large.
In Auckland, the Council debate regarding its long-term infrastructure plan culminated in a confirmed and budgeted capital works programme – a watershed moment for the city and a major step forward. Council’s updated 10-year plan identified $4.8 billion in road and footpath projects, $3 billion in public transport projects and a $4.7 billion spend in water and wastewater projects.
Across the country, the infrastructure construction sector continued to go from strength to strength. The Transport Agency’s 2015-2018 National Land Transport Programme shows a total spend of $13.9 billion, an increase of 15 percent on the previous 2012-2015 programme. This includes $6.4 billion for the State Highway network and $4 billion for local road infrastructure. The programme also targets a 21 percent increase in spending on public transport initiatives to $2 billion.
When these projected spends are combined with a raft of Crown and local government agencies across the country, there is a clear trend showing increased demand in the infrastructure construction sector for the next couple of years.
What does that mean for our business?
I recently completed a review of our design-construct projects in the infrastructure sector over the past 10 years. While we have seen a substantial increase in revenues from design-construct projects – the data indicates a fivefold increase in the past five years – profitability remains well below our business as usual result. Further analysis suggests our design-construct efficiency is increasing as we secure more work but it remains a tough and challenging market. Discussion at the pub with my construction mates suggests this trend is consistent with what they are seeing in their businesses.
The national infrastructure capital spend has also reached a level where international partners can participate more effectively in the domestic market. New entrants are bringing new skills and new practices – they’re also increasing competition and pushing the local industry hard.
Of course, profitability is not the only performance measure that we need to think about. A recent workshop with our senior design-construct team leaders re-confirmed for me how the design-construct sector provides fantastic career opportunities for those willing to put in the effort. The work is demanding – perhaps the most challenging in the sector for designers – but also deeply rewarding. Many told stories of significant stretch in key roles that led to development of real capability, personal growth and rapid progression. From a business perspective, the increasing number of larger projects provides great profile for firms and their employees that can help in winning the next job. Those big jobs also provide greater certainty around base workload, which helps mitigate some of the variability we see in other sectors.
So what will increased demand in the sector mean for the industry in this coming year?
Procurement teams are under real pressure to get their programmes out to market and we have seen a number of client agencies bolstering their procurement teams in advance. For firms, the sequencing and timing of bids remains challenging, with overlapping bid programmes placing significant demands on key resources. I suspect this year we may see firms taking a more considered approach to the bid/no-bid decision before committing teams to expensive bids.
In addition, I see the cost of bidding remaining a vexatious issue. Despite feedback from industry, the cost of bidding has increased as owners demand greater certainty over product. While it is perhaps understandable from an owner’s perspective, it is contrary to industry practice across the ditch where bid costs are lower and tender submissions greatly simplified. Anecdotally, bid costs in North America and Europe are lower again. When coupled with win rates and deferred reimbursement, the cost of bidding is a significant impost on the winnable margin available at tender. Of course, remedies such as increasing stipend payments, reducing submission requirements and reducing bidder numbers may not necessarily be favoured by owners.
The continued struggle to find and retain talented people in key design-construct roles also looms in the coming year. That fivefold increase in revenue comes with a fivefold increase in the numbers of design team leaders, design managers and key discipline leads. While we have programmes in place to meet the challenge, it is an ongoing effort to recruit and retain key talent. It’s a challenge for the sector – not just the design professionals. I’ve been in close contact with a number of projects grappling with issues that stem from having under-resourced or inexperienced teams, from the bid phase through to the delivery phase. A key issue facing our design teams is getting timely and informed inputs as the design develops, typically early in the delivery programme. Not only does it impact our own effectiveness, it often hampers downstream delivery as constructors are faced with different constructability requirements than those assumed in the design. The inevitable changes result in increased rework, increased cost and lengthening programmes.
Finally, I have a growing concern that there is a gradual erosion of the strong relationship basis on which our sector has been founded.
The size and unique nature of our market has meant that relationships have tended to be highly constructive. This has represented a significant advantage, particularly when compared with other jurisdictions. More recently however, I have observed a more transactional approach to critical processes, which I suspect is being driven by increasing competition, increased costs (relative to budget) and reduced margins. In some instances, responsibilities are being misaligned and criticism misplaced. It can get personal, and I know of two senior and very capable design-construct team leaders who turned their backs on the sector this past year because of it.
On a more positive note, the sector is delivering excellent value for owners and truly world-class projects that both industry and owners can by rightly proud of. Long may that continue.