The warnings about failing builders keep coming. This time it’s from a buyers’ agents outfit with the catchy name of ByersByers, which says spiking prices for both materials and labour may well see some higher density projects fail their completion deadlines.
According to co-founder Pete Wargent who says his group is a “national marketplace” for this relatively new subset of the residential agency industry, there are currently 100,000 detached homes under construction nationwide, “largely thanks to the government’s stimulus packages”. So “still a huge pipeline of residential work due to be completed”.
Wargent looks at the builders that have already struck trouble – Probuild placed in administration, Condev and Privium have headed to liquidation, while in Perth New Sensation Homes and Home Innovation builders “are among the latest casualties within the past week”.
He says that with construction costs continuing to increase in 2022 and higher interest rates on the way, “there is little respite in prospect for a beleaguered sector”.
Legal firm Sparke Hellmore last month noted that Probuild’s South African parent company “took a total of 18 building businesses in Australia down with it” with around 750 employees and thousands of contractors impacted.
Among the challenges faced by ConDev, the legal firm’s partner Suzy Cairney said, were financial forecasts that had to factor in steel price rises by “as much as 80 per cent” in the past 18 months. That’s before the impact of rain – 60 week days – in recent times and the floods.
Then there are the contractual difficulties, Cairney said.
“Like most insolvencies, Probuild’s collapse is also due to multiple factors.
“As if tiny margins, COVID shortages and skyrocketing materials prices were not enough, Probuild’s parent company also cited the contractual environment in Australia and the increased difficulty in raising guarantee facilities necessary to secure new work.
“Some commentators are saying Australia’s construction sector has become increasingly high risk amid a “hard-line” approach to tackling COVID-19, and that the potential risk on mega-building projects outweighs the current margins available.
“In what has become a race to the bottom, over the past decade the Australian construction industry has moved to a high revenue low margin model, leading to a culture of under-pricing already low margin work to keep revenues up. Coupled with widespread under-capitalisation the industry is facing a structural failure, which has many players on the edge of insolvency.”
There’s no point winning a project on the lowest possible price, she says – it’s not exactly value for money.
“If that’s what overseas infrastructure companies see, who is going to invest in Australian infrastructure?”
Cairney says there are ways to avoid insolvency or minimise the impact when it happens.
In the worst case scenario, she advises, principles that it might be more cost-effective to explore ways to address a financial problem rather than “let the contractor go under”.
And of course, if that fails, it’s probably a good time to make sure you’ve got a good legal contract in place.