‘On a tightrope’: Construction industry creaks under pressure

If there’s one construction site in Australia that demonstrates the economic tightrope on which the construction industry walks, it’s the Ribbon project in Sydney’s Darling Harbour.

Wrapped in glass and jutting between two arms of the Western Distributor that winds through the city’s CBD, the hotel and entertainment district development has burned two builders in just two years.

The Ribbon returned in July 2020, seven months after Grocon’s collapse. Work has progressed since then, but the collapse of the project’s replacement builder, Probuild, halted work again. Credit:Wolter Peeters, Sydney Morning Herald

After the site’s first builder, Melbourne’s Grocon, collapsed in late 2019, another Melbourne builder, Probuild, resumed work only to bring in administrators earlier this year amid cost pressures in its business were starting to bite.

In a bright patch of news, age and Sydney Morning Herald May reveal that Multiplex has taken over the Ribbon project with work resuming on the site this week, while Probuild’s South African parent company is considering a bailout to resuscitate what remains of its business after the sale process.

Despite these reprieves, the industry is teetering toward a crisis and operators across the country are already under pressure due to rising steel and lumber costs, supply chain delays and supply shortages. workforce. There are real fears that interest rate hikes in the coming year will push more groups over the edge.

Late last month, the nation’s largest homebuilder, Metricon held emergency talks with the state governments of Victoria and New South Wales before reaching a new financing agreement with its shareholders and bankers, as it struggled to contain losses on contracts it had entered into with customers before that the costs of raw materials do not explode considerably.

At the same time, a major infrastructure rollout is tying up tradespeople and other skilled workers, further driving up labor costs for residential and commercial builders.

Other homebuilders and large groups of subcontractors would also feel the effects. This weekANZ chief executive Shayne Elliott and NAB boss Ross McEwan have warned there will be more pain in a sector that generates 9% of the country’s gross domestic product, or $360 billion in revenue.

Perth-based housing estate developer Nigel Satterley said the west of the country was suffering from a severe shortage of lorry drivers, machine operators, plumbers and drainers.

His company, Satterley Property Group, is also facing supply constraints in Victoria and Queensland where it also has significant land developments.

Perth-based Nigel Satterley says the industry cannot digest the volume of work it has generated.

Perth-based Nigel Satterley says the industry cannot digest the volume of work it has generated. Credit:Fairfax

“In Melbourne, entrepreneurs have much better resources than in Perth, although everything is also tight in Melbourne,” he says.

Last year, around 34,000 plots were sold in the growing suburbs of Melbourne and Geelong. “We think the industry can only build about 20,000 a year, so there’s a bit of indigestion coming up there,” he says.

Satterley isn’t alone in sharing his concerns about the sector. A senior executive at one of the country’s largest development groups, who declined to be named over trade relations concerns, believes the sector will suffer more.

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“We are witnessing the end of a cycle that has lasted 15 years. Now it’s a cleanup and unfortunately there will be losers. Things will have to be priced accordingly. Projects will be put on hold because the numbers no longer add up. »

Experts are signaling greater pain in the sector as groups reassess project finances as inflationary pressures, supply chain disruptions and labor shortages start to bite.

“The resourcing challenges, the supply challenges, the logistics, these are all real issues. It’s an industry where there has been a culture of low margins,” says Marc Colella, director of industry at global engineering and consulting firm Aecom.

That means there’s no grease in the system when costs start to rise and labor markets get tight, he says.

“It certainly puts those big projects under significant pressure with the escalation that we’re seeing in the trades and also in the supply chain.”

Smaller domestic builders with three or four projects, who signed fixed contracts a year or two ago, are most at risk, says Colella.

The construction industry faces challenges related to land, labor and materials.

The construction industry faces challenges related to land, labor and materials.Credit:Scott McNaughton

“If you look nationally, I think the challenges are even more pronounced there because the systems and supply chains are not as advanced.

“I think they’re probably more at risk because their financial support is limited and they’re not as diverse.

Colella says there is less risk for larger, more sophisticated national and international entrepreneurs because they have more diversity and the unexpected, but there is still a lot of pressure.

“As the government continues to stimulate the construction market, especially for infrastructure projects, I see no immediate relief. We are a few years away from the industry starting to settle again,” he says.

The pressure is not only felt by contractors, it extends to all stakeholders, financiers, designers and engineers.

“The design and construction industry depended on the growth of specialized talent and skills through immigration. We are currently experiencing a significant skills shortage due to border closures during the pandemic, in a market that is seeing historically high infrastructure investment, so in combination with escalating costs and supply chain pressures , it could be considered a perfect storm,” Colella said.

Ted Fitzgerald, partner in KordaMentha’s property advisory business and construction industry expert, says developers are starting to ask their builders tougher questions to make sure they’re protected against any collapses.

Probuild went bankrupt in March with $5 billion worth of projects on its books.

Probuild went bankrupt in March with $5 billion worth of projects on its books.Credit:wayne taylor

“Developers are looking for builders with stronger balance sheets and guarantees from the parent company, so they can be sure that the uncapped liability the builder is committing to can be honored, because when the builder goes into liquidation , the developer must take the parts in addition to the additional costs, ”explains Fitzgerald.

At the same time, he says builders are starting to seek out the food chain from developers for help.

“We see situations in the market where builders approach developers and try to share the burden of these cost increases, but developers are reluctant to set a precedent and not be able to control the risk of contagion in the industry.

“They’re doing their best to survive the situation and I think good, well-capitalized builders share the pain with their sub-contractors, but it’s tough when multiple sub-contractors are having issues and the builder is on a rope. stiff with the developer on time and cost.

Fitzgerald says there are real economic headwinds facing the industry as well as a structural problem with the way the sector operates.

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“Structural problems stem from the transfer of risk to those who can least afford it. This ranges from developers transferring risk to prime contractors, and then from prime contractors transferring risk to subcontractors.

“It is the push of risk to those who can least afford it that creates this fragility leading to a disproportionate representation of insolvency in the construction industry.”

Careful observers of the construction industry point to another structural problem that has led contractors, including large subcontractors who bring workers to projects, to be forced to bear the financial stress of an overstretched builder.

In 2018, a federal government review of payment security laws in the construction industry, led by former Master Builders Association boss John Murray, urged state and federal governments to adopt new laws to protect contractors from the financial consequences of a major builder meltdown. This is partly driven by laws that allow contractors to mix the money paid to them for the work of subcontractors across their business to fund other projects or to pay first. other subcontractors.

Dave Noonan, national secretary of the CFMEU construction branch and director of developer CBUS Property Group, said the union supports the recommendations of the Murray review.

“We support the recommendations of the Murray review process, the legislation should require cascading statutory trusts,” Noonan said. These trusts would ensure that money would be set aside to pay subcontractors for the work they do.

“The fundamental question here is whether prime contractors and builders should be able to use other people’s money – in other words, sub-contractors’ money – for any purpose they wish and we believe that the current practice is not working and that legislation is needed to protect the interests of contractors and workers.

Still, change like this takes time and with the crisis raging across the industry, market watchers believe any changes – structural, legislative or otherwise – will come too late to save some operators.

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