The Biggest Risk in Construction Right Now Isn't Lack of Work

Over the past month, there has been a noticeable shift in sentiment across the New Zealand construction industry. After several years of uncertainty, project delays, rising costs, and reduced development activity, there are increasing signs that confidence is beginning to return. Contractors are reporting more tender opportunities, infrastructure investment is gaining momentum, and many businesses are cautiously optimistic that the market is moving in a more positive direction.

For an industry that has endured significant challenges over recent years, this optimism is understandable. During a downturn, much of the conversation revolves around one question: where will the next project come from? Securing sufficient work becomes the primary objective, as maintaining cashflow and keeping teams employed are essential to survival.

However, as I look at the matters crossing my desk recently, I am increasingly convinced that the industry's greatest challenge is beginning to shift. The issue is no longer simply about winning work. Instead, it is about understanding the risks attached to the work being won.

This week alone, I was involved in two matters that, on the surface, appeared entirely unrelated. One involved reviewing a heavily amended subcontract prior to execution, while the other concerned a payment dispute that had escalated through the adjudication process. One project had not yet commenced. The other had reached the point where the contractual relationship had effectively broken down.

Despite their differences, both matters highlighted the same underlying issue. Neither dispute originated because there was insufficient work available. Neither arose because the parties lacked technical competence or industry experience. Rather, both stemmed from risks that had not been properly understood, managed, or allocated at the outset of the project.

What concerns me is that this problem is becoming increasingly prevalent as market conditions evolve.

When economic conditions tighten, every participant in the construction chain becomes more cautious. Developers face increased pressure from lenders and investors. Funders seek greater certainty around project delivery and financial outcomes. Clients become more focused on cost control, programme certainty, and risk management. As a result, contracts become more heavily amended, obligations become more onerous, and risk allocation becomes more aggressive.

The critical point is that these risks do not disappear simply because someone has become uncomfortable carrying them. Instead, they are often transferred downstream through the contractual chain. Risks that were once retained by principals are pushed onto contractors. Risks previously managed by contractors are transferred to subcontractors. Each tier seeks to protect its own position, often with little consideration for whether the receiving party has adequately priced or understood the obligations being assumed.

At the same time, margins remain under considerable pressure. While opportunities may be increasing, competition remains fierce and many contractors continue to price work aggressively in order to secure projects. The result is a potentially dangerous combination: contractors are accepting increasingly complex contractual obligations while operating with increasingly limited commercial margins to absorb mistakes when things go wrong.

This growing imbalance between risk and reward is, in my view, one of the most significant challenges currently facing the industry.

Many construction businesses have become exceptionally good at identifying direct project costs. They can quickly recognise a spike in material prices, a reduction in labour productivity, or an error in a subcontractor quotation. These issues are visible and measurable, which makes them relatively easy to manage.

Contractual risk is different.

Contractual risk rarely presents itself as an immediate problem. It often sits quietly within the contract documents, hidden amongst pages of special conditions, amendments, schedules, and technical requirements. Because nothing appears wrong at the beginning of the project, these provisions frequently receive less attention than they deserve.

Unfortunately, their impact can be substantial.

A notice provision may prevent recovery of a legitimate variation simply because the correct process was not followed. A programme obligation may expose a contractor to delay-related costs that were never included within the tender allowance. A fitness-for-purpose obligation may significantly extend a contractor's responsibility beyond what would normally be expected under a reasonable skill and care obligation. A broadly drafted indemnity clause may transfer liabilities that bear little relationship to the contractor's actual scope of work.

None of these clauses appear particularly significant when a project is being awarded. However, once delays occur, relationships deteriorate, or payment issues arise, they can have a profound impact on project profitability.

In fact, some of the most financially damaging projects I have encountered were profitable on paper at tender stage. The estimates were sound, the scope was understood, and the project team was capable. Yet the project ultimately lost money because contractual risks were underestimated, misunderstood, or simply accepted without sufficient consideration.

This is why I believe the industry's focus needs to evolve as the market recovers.

During a downturn, survival depends on securing enough work to sustain the business. During a recovery, success depends on securing the right work, understanding the associated risks, and ensuring that contractual obligations are proportionate to the margins available to absorb them.

A growing pipeline is encouraging, but it should not create a false sense of security. Revenue alone does not generate profit, and a full order book does not necessarily indicate a healthy business. The quality of the work secured, the risks accepted, and the commercial disciplines applied throughout delivery are ultimately what determine whether a project contributes positively to the business.

That is why I continue to believe that the biggest risk in construction today is not the lack of work. It is the growing gap between the risks being accepted and the margins available to absorb them.

The worst contract is not necessarily the one containing the most onerous clauses. More often, it is the contract that has been signed without a full appreciation of what those clauses actually mean.

Because when a project starts going wrong, the contract suddenly becomes very important. By then, it is usually too late to read it for the first time.

If you are reviewing a contract and are unsure about the risks, obligations, or amended conditions you are being asked to accept, I offer contract review and commercial risk assessment services to help contractors and subcontractors understand what they are signing before committing to a project. You can find out more at emmolinamay.com.

Have a great weekend.

Emmolina

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Emmolina May is a Registered Quantity Surveyor, contract specialist, educator, and dispute resolution practitioner based in New Zealand. She helps contractors, subcontractors, and developers understand contractual risks, negotiate fair contract terms, improve commercial outcomes, and resolve disputes when they arise. Drawing on experience across contractor, subcontractor, and client-side roles, she is passionate about helping construction businesses avoid problems before they become disputes.