The truth behind construction costs

 Alan Pollard, CCNZ Chief Executive. 

 I recently visited Italy as part of a European holiday. If you have visited Italy you will be well aware of the incredible history, the majestic scenery, and the crowds of tourists. 

During my visit, I got to experience some pretty complex infrastructure, long and high bridges and long and winding tunnels. And I learned how long (or how short) it took to construct these infrastructure marvels. 

That got me thinking some more about just how difficult it is to get even the smallest of projects started in New Zealand, let alone large and complex infrastructure projects. And it also caused me to reflect on the strange narrative we often hear about contractors being responsible for cost escalation or poor productivity. 

Contractors are very mindful of the need to deliver projects to specifications on time and within budget. They understand projects are often funded by taxpayers or rate payers and take fiscal responsibility seriously. Contrary to the perspective of some critics, contractors mostly work on pretty thin margins. 

The truth of the matter is that, here, we seem to overcomplicate or overregulate to the point where progress in delivering the infrastructure our communities desperately need is slowed or halted. So, rather than simply saying ‘costs have gone up’, I thought I would take a moment to explain why costs have gone up. 

Cost escalation is immensely frustrating for contractors as it means they can deliver less for their clients at the same cost. Every sector has experienced cost escalation during and after Covid. Wages have substantially increased as the previous government locked in significant minimum wage increases, and as the labour shortage began to bite. Supply chains were disrupted leading to material shortages and soaring costs of the materials and their shipment. 

Legislation such as the Resource Management Act has long been a handbrake on progress, as has the interpretation and application of these laws and regulations at local government level. The Infrastructure Commission estimated that the cost of consenting was around $1.3 billion per annum. The fast-track consenting bill currently being considered should provide some relief in this area. 

Some local councils have failed to balance environmental concerns against the need for cleanfill or contaminated fill disposal sites; this has left contractors having to ship their waste well outside their regions, adding significant cost to the project and (ironically) substantially increasing project ‘carbon’ footprints. 

We hear of some councils not even allowing soil from one site to be re-used at another nearby site due to the composition of the soil being minutely different. These are examples of bureaucracy adding costs, carbon emissions, and likely preventing projects from being delivered on time or on budget, all outside the control of our contractors. 

Then there is the procurement process. In my view central and local government procurement needs a radical overhaul. I understand both the MBIE and NZTA have independently commenced reviews of procurement – this is welcome. 

We often see lengthy project definition and design phases before projects are considered for construction. 

Often contractors are not included, which can lead to un-buildable designs, (when the project could have benefitted from using an earlier proven and delivered design), or designs that aren’t fit for purpose, with contractors having to make changes to the design during delivery causing delays and cost variations. 

This is driving the media narrative of ‘cost blow-outs’, much of which is also unfounded. A recent example is a project that was priced before and after it had been designed to cope with seismic stresses described as a ‘blowout’, which is nonsense, as the construction would have required a different design. 

It is not hard to understand that different project designs at the same location will cost different amounts. 

Tenders often require contractors to respond on a small number of financial attributes and a larger number of non-financial attributes (for example environmental and social impacts, health and safety, team development, etc). Contractors can spend a large amount of time and money responding to tenders, only to find that the dominant criterion applied is the lowest cost. 

This is not an efficient procurement process and does not lead to the best project outcomes for clients or contractors. 

A better approach is to engage contractors early in the procurement process. The benefits of following this approach are that contractors are often best placed to advise what solution would work best and achieve the best outcome for clients and therefore for our communities; it can save the costs of rework that can result from having a design that is not fit for purpose; it can minimise the risk of variations to the original contract and delivery programme; and it can eventually result in the most cost-effective solution being delivered. 

It would be remiss of me to overlook the fact contractors do have control over some matters that can impact cost and delivery. 

The introduction of new and emerging technology in areas such as operator productivity, sustainability and health and safety can improve delivery performance. Comprehensive training and development programmes for staff ensures that qualified and capable teams are assigned to project delivery; reducing mistakes or rework and leveraging scale when purchasing materials. 

I am confident the vast majority of contractors do what they can to influence efficiency, productivity and cost. After all, with slim margins the slightest budget or delivery error could make the project unprofitable. 

CCNZ continues to advocate for better legislation and regulation, for a more equitable procurement model and for contractor early engagement. Clients and contractors have a common goal – to deliver quality infrastructure in a timely and cost-effective way, for the benefit and well-being of our communities. 

The best way to approach this is through a genuine partnership. 

Finally, the question I’d ask is not about the quantum of cost that has risen, but rather, why have costs risen, and what efficiencies our clients, designers, supporters and decision-makers in government are helping civil contractors reach so they can get on with the job of building transport, water and other infrastructure networks.