Towards a more informed market

Jeremy_Sole.jpgBy Jeremy Sole
CEO, NZ Contractors' Federation

Hopefully by the time you read this column you will have received an email invitation to participate in the Federation’s industry capacity survey.

We have initiated this survey in partnership with BusinessNZ for a number of reasons, most of which will become clear to contractors as they complete it. However, the underlying driver is for us and our key clients is to understand more about the capacity and capability of the industry so we are able to make more informed and strategic purchasing decisions.

It is our intention that the analysis and reports that stem from the survey data will make some small contribution toward smoothing out the ‘boom bust’ workflows regularly experienced by contractors. As CAENZ points out in its Study into the Cyclical Performance of the New Zealand Construction Industry (November 2008), “although the potential future outputs from complex systems such as the industry’s political, procurement, construction and management environment can’t be predicted at any given time, it is none the less desirable and useful to have information that contributes toward better understanding of the system’s dynamics.”

While economic theory speaks about ‘an efficient market as the outcome of each part of a market having open access to all the information from all the other parts of the market’, this isn’t, realistically, going to occur. So, those who have more information and develop an intuitive a sense of the leverage points and timing in the system are more likely to have advantage and  rise in influence and impact – often at the expense of those who don’t have this.

I guess the point is that – if our clients are better informed, they can make more intelligent and informed purchasing decisions based on market cycles and current conditions.

The antithesis of this is that there are a number of local authorities who currently have little, or no, work available to put out to a contracting industry that is gasping for work to ensure its own survival.

The contractor’s primary strategy in this environment is to offer reduced and, in some instances, lower than cost tenders just to get work to keep their businesses alive.

Later in the year, or the cycle, these local authorities are going to make decisions to use up budgets, meet KPIs, or to fast track implementation for political and practical reasons and they will place such demands on local resources that they will push prices up.

So, not only do they fail to capitalise on a good purchasing environment while it exists, they inadvertently create a sub optimal one in the process.

It stands to reason, that if some sectors of the market were to programme their work counter cyclically, then they would benefit from purchasing infrastructure at significantly lower costs from a market hungry for work.

Eventually, in a perfect world, or an efficient market, this would serve to somewhat flatten out the peaks and troughs and would enable contractors to invest in and build their businesses and a healthy industry environment ensues. Ahh... how utopian does that sound? And perhaps too much to hope for?

It feels rather strange to be focusing on this when we are on the cusp of such a large government investment in Infrastructure. However, that work hasn’t arrived yet for most of the SMEs in the contracting industry, and it might not get down to their level of the market, other than through an increased opportunity to successfully tender for the smaller jobs that are currently being snapped up by the big guys with nothing else to focus on.

Of course, there is a significant proportion of the contracting industry that doesn’t work in the telecommunications, energy or roading sectors benefiting from the record infrastructure spend, but are these are the firms who will ultimately benefit several years down the track from the growth enabled by the implementation of the new infrastructure initiatives.

In the mean time, their future relies on an uptrend in the economy or some clients who are willing to operate counter cyclically to generate significantly better value for money from leveraging opportunities through the phasing and procurement of infrastructure works.

If you are a contractor reading this please go to the federation’s website, www.nzcontractors.co.nz, click the bright red link to the survey, and make a positive contribution toward creating a healthier infrastructure procurement and construction environment.

And please circulate the survey link to as many contractors as you can – it’s in your own best interests!  



Contractor Vol.33  No.10  November 2009
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