“That didn’t take long!”
Following our article on 30 July on retentions, the very next day the media reported that Ebert Construction had gone into receivership.
Now, it has been reported that the receivers for Ebert are taking legal action to test the law (Construction Contracts Amendment Act 2015) as they attempt recovery for subcontractors. It is understood that receivers PwC have set aside $9.3m for this purpose, although much of the $36.1 million owed to unsecured creditors will go unpaid, according to the first receivers’ report.
The receivers’ first report on the Ebert Construction Limited (in receivership) has identified some interesting points and learnings:
1. The current law as drafted does not provide enough clarity
Firstly, as Ebert is the first significant insolvency requiring application of the new retentions regime, the receivers will request directions from the Court to confirm entitlements, methods for distribution and who funds the cost of these activities.
The potential here is for the court to request the government to redraft the law to clarify further.
The report also states ‘the pathway and funding for addressing these issues with the application of the legislation, we are unable to confirm the timeframe for resolution of this matter. In the interim the funds continue to be set aside.’
2. Time is against the subcontractors
The timeframe to resolve this matter could be a reasonably long duration, which would not be the most favourable result for the subcontractors that have retentions funds withheld, however necessary in the current circumstances.
This situation will provide the test case which we hope will speed up this process in future.
3. Is there a shortfall?
The report further states Ebert had been placing funds in a separate bank account in respect to retentions held on subcontracts signed after 31 March 2017, with an adjustment made on a monthly basis once subcontractor’s claims for the period had been finalised and invoices issued.
A total of $3.68m was withheld, with the last adjustment taking place in June 2018 for applicable retentions held up to the end of May 2018.
At the time of the receivership, invoices for June claims had been processed, but the adjusting transfer had not yet been made. Accordingly the balance of the separate account does not represent all retentions held for subcontracts.
This suggests there may be a shortfall, with the potential value not identified in the report. This will be an area of interest to look out for on any forthcoming reports.
4. Did diversification wound Ebert?
A further point of interest is around the sectors Ebert was operating in. The receivers state: `Ebert had two principal areas of operation, being construction of processing facilities (predominantly in the diary sector) and more general commercial (including multi-unit residential) construction. Based on the information provided to us, it appears that the company had been largely successful with the processing side of the business over many years but had mixed performance in its other commercial and residential projects.’
This seems to concur with industry insight, which has suggested the move by Ebert to more residential high-rise type projects with a higher
risk profile may have contributed to the pathway that has led to receivership.
The ability of contractors to undertake multi-unit residential apartment projects is an area of concern in the industry, as higher density requirements translates to more apartment projects being undertaken.
5. Did Ebert have the right resources and skills in place to build apartments?
Multi-unit residential apartment-type construction includes complexities not always evident in other commercial projects, such as:
- Normally smaller inner city sites with limited access and complicated traffic management restraints
- Smaller building footprints resulting in limited work fronts with a more linear workflow
- Given the increased size of the number apartments per development, an estimating omission or construction defect on one unit can multiply by the quantity of the apartments.
- High concentration of subcontractors in short periods of time with resourcing and personnel management essential tight timeframes requested to meet sunset date requirements for purchasers.
It is essential that contractors have the requisite resources and skills in place for this type of work, including highly experienced personnel who have previous apartment experience, to navigate through the challenges of this type of work.
There have been many experiences in the market lately where apartment projects have experienced issues as a result of:
- Inexperienced personnel
- Subcontractor supply demand pressures leading to delays
- Construction programmes with unrealistic durations for current market conditions
- Insufficient site management to ensure works are completed in a timely manner to the level of quality required.
- Façade complexity and procurement issues
- Cost escalation associated with the project durations as not all subcontractors can be let at the commencement of the project.
6. Do your contractor due diligence thoroughly
With the construction industry under supply constraints regarding labour, materials and subcontractor availability managing the risks above is increasingly difficult.
Our advice to our valued clients and the market in general is ensure you have completed sufficient due diligence during your contractor selection, including the site personnel who will deliver the works.
Given the projection by MBIE in the latest pipeline report that 60% of residential consents will be multi-level developments by 2023, the construction sector will have to quickly respond to the challenges on how to successfully deliver high rise projects, to avoid further company failures.