If New Zealand's construction industry is to thrive, the bottom line is that clients, particularly government ones, are going to have to pay more for buildings.

Steve Killeen, chief executive of Downer's New Zealand operations, spelled out the numbers at an industry conference earlier this month.

Any "decent" construction company wants to achieve a 3 per cent profit margin after tax, Killeen told the conference, implying that a 7 per cent gross margin is required to maintain the status quo to avoid further industry collapses and losses.

If the government wants the industry to invest, particularly in technology and training, gross margins need to rise by about another 3 percentage points to 10 per cent, Killeen said.

He emphasised that the industry shouldn't be signing contracts it doesn't understand, or which impose unreasonable conditions. Nor should it be exposing itself to risks it can't quantify or manage. Ground condition risk, for example.

The consequences of failure abound at a time when construction in New Zealand has been booming for years and with a visible pipeline ahead suggesting that's not going to end in a hurry.

Treasury has just published a document, the National Construction Pipeline Report for 2019, which forecasts total construction, including the gamut of housing, commercial and infrastructure projects, will peak at $43 billion in 2021 but tapering off only a little to $42 billion by 2024.

The major indicators of industry distress are the collapses of Ebert, Orange-H and Arrow International, the sale of Hawkins to Australia-based Downer and the near $1 billion in losses Fletcher Building's high-rise construction arm, Building+Interiors, has reported.

When Fletcher announced its withdrawal from the high-rise construction market in February 2018, the government was clearly alarmed at the loss of such an important domestic player and that led to the signing of the Construction Sector Accord in April this year.

It was no accident that Fletcher's construction head, Peter Reidy - recruited in the wake of those losses - chaired the committee that developed that accord and Fletcher Building chief executive Ross Taylor has since declared the B&I unit open for business again, albeit cautiously.

Treasury's Infrastructure Transactions Unit will be folded into the planned new Infrastructure Commission, Te Waihanga, once it has been established. The unit's interim head, Karen Mitchell, told the conference that understanding of risk in construction is very poor across both the public sector and within the industry.

A lot of that came down to the growth of contracts that forced all the risks onto contractors.

The 197 pages of special conditions attached to Fletcher's contract to build the Christchurch Justice and Emergency Services Precinct - that project alone accounted for more than 40 per cent of the B+I losses - was "bizarre," Mitchell said.

Read the full article on NZ Herald here