Modelled cost of quality defects found during new residential construction, New Zealand 2018, as a share of residential construction output

What it is. 5.4% of the output of the residential construction industry ($995 million of $18.43 billion, central case): the modelled cost of rectifying quality defects found during construction, from a 90% defect prevalence (informed by New Zealand surveys of new houses) and an assumed 6% average cost per defective job (set from overseas studies).

Range 2.6% to 8.6% (scenario)

Sample. A computable general equilibrium study (NZIER, ORANI-NZ) for BRANZ. Inputs: 90% prevalence (85% to 95%), 6% average cost of a defect (3% to 9%), residential output $18.43 billion for 2018. The 90% rests on BRANZ new-house quality surveys (92% of 225 houses in 2014 had a quality or appearance defect; 96% had a compliance defect at the first inspection); the 6% is set from the literature review, which cites Australian and UK studies of rework or defect cost averaging 2.4% to 6.4% of contract value (UK 5.8%; Australia 2.4% and 3.15%, 4.1% with a 3.0% to 11.2% range, and 6.4% direct and 5.6% indirect). Cost $995 million central, $420 million to $1,744 million across the range.

What it is not. A model, not observed rework. Only the prevalence is informed by New Zealand data; the average cost of a defect is an assumption taken from overseas studies, and the report assumes those estimates apply to New Zealand. The 5.4% is prevalence times average cost (0.90 x 6%), applied to all residential construction output, including the residential share (45%) of construction services; the report scopes the study to defects found during construction of new houses but assumes non-new work has the same prevalence. Out of scope by the report's own list: civil and non-residential work, alterations and maintenance, undiscovered defects, leaky buildings and earthquake repair. It is an industry-wide resource cost that the report says falls on builders but is priced into construction costs, so it is not the loss of any one contractor. The denominator is industry output, not a contract value, so it is filed as ratio_of_other and is not multiplied by a job value. The range is the report's low and high scenarios (ER49 Table 7: 2.6%, 5.4%, 8.6%; Appendix Table 13 agrees); ER49's own Table 8 and the BRANZ summary's Table 2 both print the 2.6% and 5.4% in the wrong columns.

Where it came from

• NZ Institute of Economic Research (NZIER), for BRANZ (2020), The Economic Cost of Quality Defects (BRANZ External Research Report ER49)
  Table 7 (p.22), Table 8 and Table 9 (p.24) · source record
• BRANZ (2021), BRANZ Research Now Quality #2: The economic cost of defects in new residential buildings in New Zealand
  Table 2 (p.2): confirms the $995 million central estimate · source record

Considered and set aside

• PricewaterhouseCoopers, for the Department of Building and Housing: Prices the leaky-building repair bill (NZ$11.3 billion in 2008 dollars, 42,000 failing dwellings built 1992 to 2008), which ER49 puts out of scope. The report does not split failures between design, workmanship and materials and 69% of the cost falls on owners, so it is not rework by a builder and is not filed under any cause.
• The Conversation (Mark Kirby, Auckland University of Technology): Presents the $2.5 billion as nearly 10% of sector value lost to quality failure. In the NZIER study $2.5 billion is a GDP effect in the economy-wide model, not a cost of defects, so the 10% is not used.

rework/quality_defects_residential_cost_nz · NZ · F41, F43 ·the record ·link to this figure ·dispute this figure(or email support@demiton.io)