Thursday, July 5, 2018

Frank Newman: The rising cost of construction

Last week a China Airways flight touched down in Auckland with two hundred construction workers on board. They were brought over by a Chinese based construction company building a luxury hotel in Auckland.  They are the first of many overseas workers required to fill  a labour shortage gap in the construction sector. 

According to Immigration Minister Iain Lees-Galloway that gap may be 30,000 workers: plumbers, electricians, engineers, builders and project managers.

Meanwhile, tens of thousands of fit and able New Zealanders receive the unemployment benefit. It makes no sense that there is a skills shortage in the construction sector at all, but even less sense that such a large potential labour pool is paid to do nothing  - although to be fair, to say they do nothing is not correct.

Some of the long-term unemployed do make a genuine attempt to find work; all they need is skills training, encouragement, and assistance to overcome the circumstances that may be preventing them from finding work. However, some make no attempt at all and would rather receive a benefit, do some cash jobs on the side, and have the free time of a retiree. Those people need to be forced off the benefit and into work.

There has never been a better time for people to make a career in the trades. Builders are crying out for reliable workers: Those who will turn up on time, make an effort, have a positive attitude, and a drug free mind. The "there are no jobs" excuse just does not wash anymore - it never did but in today's building boom it is shown to be an excuse rather than a reason.

The labour shortage is very evident in the charge-out rate of builders. To get workers, they need to attract them from other builders by paying more. They then add their margin to arrive at the charge out rate.

By way of example, I am aware of a local builder charging out their apprentices at double their pay rate. So $20 an hour paid, becomes $40 an hour charged - plus GST, so $46.

A simple and approximate way to convert an hourly rate to an annual wage or salary is to double the number, and add the word "thousand". So $20 an hour is 40 thousand dollars a year, and $40 an hour is $80,000 a year. So the builder paying an apprentice $22.50 an hour and charging them out at out $45 (plus GST) an hour would receive $90,000 a year, pay their worker $45,000 and pocket $45,000.

If the apprentice gets a pay rise to $25, the charge out rate would go to $50 an hour (plus GST), and add $10,000 a year to the house building cost, five going to the worker and five to the builder.

Extend that example to a gang of say four chippies (two apprentices, a qualified carpenter, and a carpenter/site foreman) on a 12 month building project, and you get a feel for the effect that rising labour costs have on the cost of a house building project. Add to that the significant increase in the cost of building materials and sub contractors, and it's pretty easy to see why building costs have risen hugely in the last few years.

Building is not the only cost on the rise. As from 1 July Auckland motorists are paying 11.5 cents per litre of fuel in the form of a road tax. (The tax is actually 10 cents but the government of course wants to make money as well so it’s charging the goods and services tax on top of the tax).

The Auckland tax was legislated by Parliament but it is now highly likely that new legislation will be passed to allow other councils to follow suit. And they will. Local council's seem to spend a large part of their time lobbying for new ways to squeeze more juice out of ratepayers. It's a shame they don’t utilise that time thinking about providing better services to those they serve, including finding ways to improve the efficiency of their spending, rather than just focussing on ways to spend more.

If that's not bad enough, it is almost certain that on the 1st of September central government will increase excise tax on fuel by 3 or 4 cents a lite, and will do so every year for the next three or four years.

The bottom line is that various new tax impositions on petrol will see the price rise significantly. That means private motorists will pay more at the pump and more for goods and services, like builders and building materials, as businesses recover increased freight and travel costs.

Don't expect building to get cheaper anytime soon!

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.


flow said...
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so most of the problem is the 100% profit on the work of each employee..

Anonymous said...
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The 100% markup is reasonable. 90% covers non productive time: travel, holidays, sick leave, training, waiting around for supplies, visiting to price a job, etc.

Anonymous said...
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...Also, the 90% covers rent, rates, power on the depot, stores on hand, etc. Tradesmen tell me that 40% of their gross income goes on gst, tax, levies, rates, etc.

A.G.R. said...
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Could I suggest to flow, that she read the article again, & more carefully this time.
The major problem in the construction industry is a lack of FORWARD planning. Governments have preferred to pay people to do nothing, rather than paying them to train for employment. Compliance regulations employ an army of bureaucrats, who would be better employed as construction workers etc.

Anonymous said...
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FRANK $40 plus gst is $46
Builders have to put up with dangerous dust and particles coming off the man made wood products, plastics and fiberglass they hasve to work with. They have to supply there own tools as well. they have to pay for parking when they take their tools to work because if they leave them there, they will not see them again the next day.
we know of a British lady who has been asked to leave NZ after paying extortionate amounts to the NZ govt over the years to try to get a permanent visa, because she is doing a job a NZer could do. I know of councils charging extortionate amounts to customers who wnd usp getting no where, and then the councils want more with no guarantee of a successful decision. I am glad I am retired because of the stupid over regulations. Shit, why would young people want to work here any more. They are better of doing computer IT work, IE doing nothing to make NZ better.


Bruce Somerville said...
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Experience (over 50 years) is that construction activity cycles follow Real Estate activity cycles. Real Estate activity is relatively fluid and can accelerate and decelerate fairly quickly in response to the various influencing factors. The building industry, however, is like a heavy flywheel and takes a longer time to respond and 'gear up' to meet increased demands in response to real estate market trends. It is during this 'catch up' phase of the building cycles that prices rise most quickly as contractors and suppliers in the various building trades become 'overwhelmed' by rapidly increased demand for their products and services. This is a 'free market' phenomena that players need to be aware of and try and plan for.