CONSTRUCTION ECONOMICS

ASSIGNMENT 1

PROPOSAL FOR GREY’S FITOUT:
PROPOSITIONS ON HOW TO WEATHER THE
RECESSION STORM

DATE:
6TH
OCTOBER 2013

LECTURER:
Dr. JAMES ROTIMI

BY:
ANUSHYA RAMASEGAR


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FACULTY OF DESIGN AND CREATIVE TECHNOLOGIES

AUCKLAND UNIVERSITY OF TECHNOLOGY
TE WANANGA ARONUI O TAMAKI MAKAU RAU

School of Engineering

Master of Construction Management


Name ANUSHYA RAMASEGAR
ID Number 1380633
Paper Name CONSTRUCTION ECONOMICS
Assignment Proposal for Grey’s Fitout: Propositions on How to Weather The Recession
Storm
Number of words (excluding appendices) 3232
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Anushya Ramasegar 06/10/2013
………………………………………………………….. ……………………
Signature Date


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TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY ............................................................................ 4
2.0 ISSUES ......................................................................................................... 4
3.0 BACKGROUND ........................................................................................... 5
4.0 ALTERNATIVE COURSES OF ACTION .................................................... 6
4.1 Employee Focus ......................................................................................... 6
4.2 Staff Secondment to Dunedin Office .......................................................... 6
4.3 Expanding Network and Marketing Services .............................................. 7
4.4 Establish inter-firm relationships and partnerships with suppliers ............... 8
4.5 Hiring and Pay Freeze ................................................................................ 8
5.0 IMPLICATIONS ........................................................................................... 9
6.0 RECOMMENDATIONS AND CONCLUSION .......................................... 12
7.0 REFERENCES ............................................................................................ 13











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1.0 EXECUTIVE SUMMARY

Grey’s Fitout Pte. Ltd. has benefitted from success since the establishment of the
company in 1999. With 53 employees and offices in Christchurch and Dunedin, the
company has had a comfortable profit margin annually and has a five year expansion
plan in the future.
However, recent events of the Canterbury earthquakes have largely affected not
only the company but the economies of the city of Christchurch as well. Constant
aftershocks, floods and rebuilding works have hampered works on on-going projects
in Christchurch.
This report attempts address these problems and aims to produce solutions to
mitigate losses and sustain the business. Several solutions have been researched and
studied pertaining to the recession problem. The remedial solutions recommended
are:
 Employee focus

 Employees involved in site work should be seconded to the Dunedin
office where there are ongoing works in the Otago Polytechnic Project

 Initiate efforts to expand network and market the services offered by the
company by approaching public institutions and tertiary institutions for
long term grants and contracts.

 Establish inter-firm relationships and partnerships with suppliers to
strengthen company’s financial position

 Implement a freeze on hiring and pay

The advantages and disadvantages of the methods recommended shall be discussed
in detail in Section 4.0. These remedial measures shall be implemented over a period
of one year before an outcome performance review is done.

2.0 ISSUES
One of the major setbacks as a result of the earthquakes in Canterbury is the
economic impact on SMEs (Small and Medium Enterprises). Due to inevitable
circumstances ongoing projects have been halted causing a standstill in the
company’s revenue. The impact of this occurrence has a caused a ‘domino-effect’ on
the economies of the Christchurch area.
In addition to that, planning and reconstruction policies are currently being
reviewed and revised immobilising reconstruction works. SMEs involved in the
construction industry are facing a dilemma as sales revenues and profits decline. In
an effort to cut down costs manufacturers and suppliers will cut back on production
of material and equipment further delaying ongoing reconstruction works. Inability
to settle debts further reduce the company’s valuation to obtain financing from
banks.
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These effects produce a chain reaction and affect many other SMEs who rely on
manufacturer’s output to do business.
Since SMEs finance their firms through debt or equity sources. The capital structure
used allows the company to optimise the use of it resources. Most companies employ
this method because it allows the owner to maintain full control of the business and
also because it is the most economic form of financing. However,

3.0 BACKGROUND
The earthquakes in Canterbury left a trail of economic destruction so severe
that the rebuild cost will be equivalent to around 10% of the Gross Domestic Product
(GDP) of New Zealand (New Zealand Parliament”, 2011). A better picture can be
painted by comparison looking at the rebuilding cost of the Fukushima tsunami
which only took 3% - 4% of Japan’s GDP (New Zealand Parliament”, 2011).
Damage assessment is higher compared to forecasted figures. Damage
estimates have increased from $15 billion in the 2011 budget to $20 billion and
possible up to $30 million if business disruption or additional costs from inflation,
insurance administration or rebuilding to “higher standards than before the
earthquake’ are included (“New Zealand Parliament, 2011). According to New
Zealand Department of Statistics (2011), building activity fell in the September
quarter, down 2.3% and is the third consecutive quarterly falls.
The graph below shows the latest four quarters has fallen by 16% followed by
three quarters of rises. The onset of recession is a worrying cause to SMEs especially
to businesses which are involved in the construction industry. Due to the volatility
nature of the business an economic recession can easily bankrupt a business.


Figure 1: Quarterly Trend Values of Building Works (New Zealand Statistics, 2011)

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4.0 ALTERNATIVE COURSES OF ACTION

4.1 Employee Focus
The most important resource a company has during the time of a downturn or
a recession is its manpower. Hence it is vital the employees of the company are
looked after. For two reasons, employees can use the recession time to network for
the company and keep in touch with their clientele to avoid losing out on job
opportunities and also retrenching workers proved to be counterproductive in the
long run as hiring new staff and training them from scratch is not cost effective and
also, the retrenching exercise reduces morale amongst employees and reduces their
confidence in the company and their role in the company (Owen Richason, Marc
Davis, 2009).
Employees would feel that they're appreciated and keeping them well
informed about the changes the company is going through are the primary ways to
ensure that they will not want to cut and run the moment someone comes along with
a better offer. Providing career development options when monetary compensation
isn't possible because this will help employees to perform better and go further in
their careers. Above all else give recognition; feeling appreciated is human desire
and a motivator. It costs nothing yet pays back time and time again. It fosters team
working, partnering and better relationships. Recognition need may not always be a
financial reward, although in some circumstances that would be appropriate, but in
most instances a simple gratification of effort will go a long way to creating an
attitude in employees where they want to give more. Reward the employees when the
company performance allows such measures to be implemented, by means of a raise
and/or a promotion would be an ideal motivation for the employees.
Since the recession is localised, one of the best ways to retain talent is
through the environment that is created. Employees would depart from the company
for reasons monetary reasons and some due to work life balance, environment, and
some due to work culture. It is usually the company values and climates that they
create. Thus, working on creating and strengthening the right environment would be
a great place to begin. From a process perspective, this could begin through surveys
of employees. More important than the survey are the actions taken by the
organization based on the feedback. Listening to and acting upon employee input are
fantastic first steps any organization can take, regardless of size or industry.

4.2 Staff Secondment to Dunedin Office
A work scheduling analysis should be made to identify site workers are
available along with a cost benefit analysis to identify the possibility of temporary
secondment to assist the Otago Project in Dunedin. These workers shall remain there
for a period of time to assist in improving customer-client relations while
endeavouring to secure projects there.
Professional placements give employees the opportunity of acquiring new
skills whilst continuing their employment. The seconded staff experience away from
the norm could lead to valuable experiences whilst on placement and generally gain a
broader outlook. An employee who is willing to take the secondment also
demonstrates his/hers flexibility and adaptability, both of which are desirable for the
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company. The company would benefit from allowing employees to take secondments
in many ways. Employees that have taken a secondment acquire transferable skills
and knowledge that they can put into practice once they return to their original
position. These skills can then be communicated across through to the team by
means of in-house seminars or presentations to the remaining team members to
improve and enhance the skill set of other staff.
The benefits of secondments are usually significant; however, the drawback
would be the possibility that when a seconded employee returns to the organisation
they will have had such a rewarding time while they have been away that may want
to leave their job in favour of the new one. To overcome this, it must be implemented
that the returning employees should be immediately encouraged to put their new
skills and experience into practice, meaning that their role may have to change.

4.3 Expanding Network and Marketing Services
During a recession the organisations which are most likely to be least affected
by an economic downturn are governmental organisations and educational
institutions; including tertiary institutions. Preparing a business case or a business
proposition and approaching schools and public institutions for a long term grant
could either bring a positive outcome or a neutral outcome. Bullington and Mulane
(2001) stated that small businesses should focus upon investing time in developing
partnerships with customers having strong capital backing and positive cash flows.
Apart from that, there are numerous regional business partners around the
country, prepared to help local businesses develop and innovate with expert
suggestion and access to funding. Regional Business Partners have been set up by
New Zealand Trade & Enterprise (NZTE) and Callaghan Innovation is leading the
cause as a hub for business development know-how by providing research and
development (R&D) expertise. Each successful partner works with local businesses
in their region to give advice, support and access to funding to help them grow their
businesses.
The New Zealand Government, provide grants and incentives regardless of your
chosen industry or business type, there are a variety of grants and incentives
available to help the company to grow. Two possible avenues will be discussed
which are the following (Regional Business Partners, 2013):
 New Zealand Trade & Enterprise, NZTE Capability Development Vouchers.
 Business’s research and development funding from Ministry of Science and
Innovation (MSI)
The Government’s business research and development (R&D) funding programmes
are managed by Callaghan Innovation, an essential body set up to accelerate the
commercialisation of innovation in the private sector. The primary aim is to build
links between business, government and research organisations and to improve New
Zealand’s prosperity through science and innovation (Regional Business Partners,
2013).

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4.4 Establish inter-firm relationships and partnerships with suppliers
Sandee (2002) indicated that in times of economic distress firms that succeeded in
times of economic recession relied upon collaboration to reduce cost and risk while
expanding their network to ensure operational flexibility. Also, Parrilli (2002) notes
that small businesses that can adopt a flexible specialization paradigm focus upon
intra- and inter-firm relations and tap public and private supporting institutions are
more likely to survive in times of an economic crises. Establishing a partnership as
such not only strengthens the companies during a crisis but also portrays a reliable
image and helps build trust and foster social relationships with clients.

4.5 Hiring and Pay Freeze
Although many firms prefer to opt for the redundancy or retrenching approach, it has
been proven to be counterproductive in the long run (Marc Davis, 2009). Instead, a
less harsh method can be implemented by freezing pay rise, staff allowances, travel
allowances, selected staff benefits, commission and training allowances. This allows
the company to have a certain surplus of capital to weather out the recession storm.
Also, the employees concurrently will be aware of the company’s sense of
consideration and will develop a sense of loyalty towards the company. This
indirectly will boost morale amongst employees and promote a positive work
environment.




















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5.0 IMPLICATIONS
The main concept of sustaining a business while weathering a recession storm
is not to make drastic or dramatic changes but small ones which will help with the
growth of the company in the long run. According to Battisti (2011) (Table 2), more
than half of urban SMEs affected by recession opt for an increase of revenue
approach whereby the company aims to increase their resource by introducing new
products or services. Other companies opt for a more conservative approach by
adopting the cost cutting approach by introducing salary deductions, redundancy and
reduction in advertising and marketing.


Figure 2: SME Strategic responses to the recession (Battisti)

However, if the two approaches are combined, the ‘increase of revenue’
approaches and the ‘cost-cutting’ approach are combined; there would be a balance
of negative and positive initiatives creating the optimum solution for Grey’s Fitout to
take on the recession onset. This approach which is called the ‘ambidextrous
approach’ is proven to be successful with SMEs who opted for a positive approach
coupled with a negative approach (John Kitching et al, 2012). In this case adopting a
pay freeze and combining it with methods to increase revenue using networking and
marketing provides a diversified approach to the problem opening several different
avenues where the company can benefit from.




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Table 1: Benefits and Implications of Business Solution Proposed
No. Implementation Benefits Disadvantages Implications
1 Employee Focus
 retain talent
 increase
employee loyalty
 improve
employee
productivity
 cost
inefficient in
the long run
 company
will be ready
for boom
period post
recession

2
Staff Secondment
to Dunedin Office
 increase
productiveness in
Dunedin office
 expand network
in Dunedin
 increase revenue

 employees
may not be
willing to
locate to
Dunedin
 opportunity
to expand
business in
Dunedin
office
 cost of
relocating
employees
3
Expanding
Network and
Marketing
Services
 minimise effect
of recession
 able to utilise
employee
 increasing
revenue
 less cost
involvement
 rejection

 possibility of
attracting
new clients
and projects
thus
increasing
revenue
4
Establish inter-
firm relationships
and partnerships
with suppliers
 increase potential
of gaining
contracts
 increase revenue
 able to utilise
employees

 high cost of
initial start-up
 decision of
whether to
dissolve
partnership
post-recession
 lesser control
over business
 a successful
partnership
that could
last long
term
 conflict of
interests
might occur
5
Hiring and Pay
Freeze
 help create
positive work
environment
holistically
 increase
resources
 short term
solution
 possibility of
losing some
employees

 Employees
are retained
post
recession
 Financial
difficulties
mitigated


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Table 1 above represents the solutions recommended along with the positive,
negative outcomes and the implications that follow if the solution is implemented. It
is recommended that the solutions above be implemented on a stage by stage basis.
This is to allow the onset of changes and subsequently permit the evaluation of the
effectiveness of the method implemented. A gradual increase in the intensity of the
measures implemented is recommended to cushion the impact of the recession
towards the company and its employees.
The norm during a recession is to declare redundancy and perform a
retrenchment operation. However, literature has proven this to be counterproductive
in the long run as difficulties arise post recession whereby there is a need to hire and
train new talent (Marc Davis, 2009). This is disadvantageous in terms of resources
and also affects the overall working environment and dynamics of the company
(John Kitching et al, 2012). Hence it is recommended that the company takes
measures to boost morale amongst employees to and continue to develop them to
better handle the business post recession. Employees make up the quality of the
service provided by the company, satisfied employees produce good quality works
which in turn, design a quality trademark which will improve the company’s image.
The next step would be to second site staff to the Dunedin office to assist
with the ongoing Otago Polytechnic Project. This measure would provide the
company the opportunity to utilise some of its manpower productively. Having a
bigger staff count in Dunedin could prove to be beneficial as the prospects of
obtaining bigger contracts are there.
Thirdly, expanding the network and marketing company services is an
economical way to market the company’s services. The recommendation is that, the
company approaches government organisations and tertiary institutions with a
business proposition recommending long-term contracts at a discounted rate. Even if
this measure does not pay off immediately and the company experiences rejection, in
the long run, this method could be still used to obtain contracts, build client
relationships and market the company’s services. Also, maintaining relationships
with current clients is equally important (Sameer Prasad, 2012). This is to ensure
continuity in business relationship with them.
Gauging the severity and duration of the recession, forming partnerships with
suppliers or other companies could prove to be a symbiotic solution. Although there
are drawback to this method, such as lesser control of the company and the decision
of dissolving partnership post recession, if the circumstances call for this measure, it
will allow the company to stay afloat through the recession. The integration and
coordination between the companies involved would be an asset when bidding for
contracts.
Lastly, hiring and pay freeze should only be implemented under drastic
circumstances. The recommendation is that employees will have their standard
benefits frozen along with their pay. Although this may produce disgruntled
employees, there is the silver lining that they were not retrenched or made redundant.
The company can capitalise on this aspect further motivate the staff by reiterating
that the measure taken is only temporary.



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6.0 RECOMMENDATIONS AND CONCLUSION

Recession can be seen as a threat or an opportunity to exploit the advantages
that it brings. Companies typically adopt an approach best suited to their financial
needs and future plans. No matter what the strategy is, there is always a certain
amount of risk that comes along with the chosen resolutions. However, failure to
adapt to the recession would prove to be costly to any business.
Having said that, it is recommended that an ‘ambidextrous approach’ be
adopted to cope with the current recession onset experienced by the company.
However, the implementation process should be performed in stages so that the
company can adopt a ‘wait and see’ approach to the outcome of each stage before
proceeding to implement the subsequent approaches.

























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7.0 REFERENCES

Cardomone and Joseph R., 2008, Small business opportunities exist in recession, Boulder County
Business Report 27.25

Sameer Prasad, Jasmine Tata and Xuguang Guo, 2012, Sustaining small businesses in the United
States in times of recession, Role of supply networks and social capital, Journal of Advances
in Management Research, Vol. 9, Pg 8-28

Nick Churchouse, 2009, Dominion Post, Wellington, New Zealand

Martina Battisti, David Deakins and Martin Perry, 2011, The sustainability of small businesses in
recessionary times, Evidence from the strategies of urban and rural small businesses in New
Zealand, International Journal of Entrpreneurial Behaviour and Research, Vol. 19, Issue 1,
Pg 72 – 96

Owen E. Richason, How to manage a business in a recession, Demand Media, Retrieved from:
http://smallbusiness.chron.com/manage-business-recession-2468.html

Marc Davis, 2009, The impact of recession on business, Investopedia, Retrieved from:
http://www.investopedia.com/articles/economics/08/recession-affecting-business.asp

Frank Vickers, 2006, Recession proofing your business, Retrieved from:
http://eprints.kingston.ac.uk/5852/1/Kitching-J-5852.pdf

Bullington, K.E. and Mullane, J.V. (2001), “Supplying entrepreneurial venture: lessons from
information technology companies”, Management Decisions, Vol. 39 No. 1, pp. 59-63

Sandee, H. (2002), “The impact of the crisis on small-scale enterprise in Java, findings from selected
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