Vanessa De Groot 15 Dec 2021
Alongside a house price boom, Australia is in the midst of a homebuilding boom, with the Housing Industry of Australia expecting a near-record number of new homes will be built over the next 12 months.
But for many in the residential construction sector, it’s a profitless boom – and several major players have recently gone bust, with fears more will follow.
Brisbane-based giant Privium and Tasmanian-based Inside Out Construction have gone into voluntary administration, while ABD Group in Melbourne has been put into liquidation.
On the Sunshine Coast, BA Murphy Constructions has had their licence suspended by the Queensland Building and Construction Commission after allegations it wasn’t paying sub-contractors.
Why are construction companies folding?
A perfect storm of factors has been brewing for the better part of 2021, and now the rainy season has arrived.
Supply chain issues, with a shortage of building materials worldwide resulting from COVID-19 disruptions, coupled with natural disasters from freak storms to bushfires, have heaped pressure on builders.
Those shortages have led to prices rising exponentially, particularly for timber and steel.
On top of that, a labour shortage is making it difficult to find tradespeople, giving workers the power to command huge wages.
So, the overall cost of constructing a new home has been pushed up significantly.
Adding to this is the lengthy delays in actually getting the materials, which has led to some homes taking more than 12 months to be build, further adding to building companies’ costs.
With the majority of builders signing fixed price contracts with buyers, and the margin for escalating costs being inadequate, many are losing money on every single project.
It’s a big problem in exceptional circumstances like we’re seeing at the moment, said Russ Stephens, co-founder of the Association of Professional Builders.
“The average cost of a contract for a builder has gone up between 15% to 20% over the past six or seven months alone – and up to as much as 50% in some areas,” Mr Stephens said.
“But because they’ve already signed a fixed-price contract, they’re unable to recoup the costs from customers, which means they have to absorb it.
“They have a fixed income coming in, but they money going out is up.”
Mr Stephens estimates some builders are losing about $40,000 on each job, and for those doing larger jobs, they’re more likely losing hundreds of thousands of dollars.
Peter Koulizos, Property Investment Professionals of Australia chairman, said the HomeBuilder grant, which offered up to $25,000 to eligible buyers signing a building contract from the middle of 2020 until March 2021 – a scheme designed to stimulate the economy following COVID – was the catalyst for the issues that now plague the building industry.
It led to a building boom by pushing demand up significantly, but with a supply shortage occurring at the same time, it created the “perfect storm”, Mr Koulizos said.
It’s just the tip of the iceberg, with more failures to come
The issues in the building industry will likely carry through until at least the end of 2022, Master Builders Queensland deputy CEO Paul Bidwell said.
“We think there will be more insolvencies, and the time we’re really concerned about is the first quarter of next year,” Mr Bidwell said.
Initially, supply chain issues were impacting mostly smaller builders that didn’t have leverage with big suppliers, but it’s now impacting all builders, big and small, he said.
Mr Stephens believes more than 60% of builders are currently losing money, with many failing to manage their finances properly.
“This is the tip of the iceberg at the moment – we think it’s going to get a lot worse in 2022 in terms of building company failures,” he said.
According to Mr Stephens, the problems in the industry need to be addressed openly and honestly, with financial education programs for builders needed to help reduce the number going bust.
“If we sweep it under the rug, it will be too late next year,” he said.
Builders need to understand where they are right now financially and where each jobs sits in terms of profitability, which will help with starting their next job and signing future contracts, Mr Stephens explains.
They should also be careful about signing contracts too far in advance, unless they factor in appropriate cost rises, he added.
What can buyers do to reduce their risk?
Many more buyers are likely to be affected by construction companies folding, with the mental health cost for both builders and buyers involved being “extraordinary”, according to Mr Bidwell.
But those yet to sign a contract can take some steps to reduce their risk, he said.
People interested in building would be wise to wait 12 months to see if some of the major issues are alleviated, to be able to trust a builder won’t go broke and there will be some more stability in costs, according to Mr Koulizos.
“There is now no extra demand from HomeBuilder because it has finished, but there is a still a worldwide shortage of certain building supplies,” he said.
“If you’ve got the land and there is no urgency to build, just wait and be patient. A 2.5% interest the holding costs won’t kill you, and you’re going to be building with more surety in 12 months.”
For buyers signing contracts with builders now, Mr Koulizos’ number one tip is to make sure the builder has the right insurance cover, to cover you if they go bust.
In that case, the insurance company will pay for someone else to come in and finish the job.
That’s not an easy process, and it means owners will be stuck living somewhere else for a much longer period, but it gives some protection, Mr Koulizos said.
“If you’re already building, with your home already under construction, buyers should make sure they only make progress payments after somebody has inspected it to make sure all the work you’re paying for has been done.”
Anyone signing a contract today should do their homework and think carefully about which builder they choose, rather than just going with the best price, as it might not be enough to complete the build, says Mr Bidwell.
A cost-plus contract, where the actual cost of supplies is passed onto the buyer throughout the building process, is also an option, but those aren’t favoured by banks due to the uncertainty.
“Buyers should talk to builders and see if they are confident they can deliver on time and for the price,” he said.
In some cases builders have come back to owners and asked for more money to deliver the build, and that can be done if builders and owners agree, he added.
“The only saving grace in this is that the housing market has gone mad,” he said, adding that some buyers are willing to pay the extra cost – if they had the capacity to – because they know their properties have experienced a significant value uplift due to the housing boom.
While each state is different, in Queensland a temporary measure has been implemented by the state government in the form of an independent mediation service called the Accelerated Builder/Consumer Dispute Framework.
It’s designed to deal with disputes between owners and builders should they arise.