Australia is in the grip of a crisis in the construction sector, with 16 businesses and countless jobs disappearing – and the situation will only get worse.
It started in the final days of 2021 – and since then Australia’s construction bloodbath has been relentless, with at least 16 companies going bankrupt and others hanging by a thread.
Privium and BA Murphy both folded in December last year, and in January 2022 around 40 families were left in limbo and tens of thousands of dollars out of pocket after Hotondo Homes Hobart collapsed with debts of more than a million dollars.
A month later, construction giant Probuild was placed in voluntary administration, leaving 750 jobs on hold.
It was quickly followed by Condev the following month, with the company going into liquidation after failing to secure a reported $25 million bid from the developers.
And this grim list has continued to grow as a number of other top companies have also collapsed including Inside Out Construction, Dyldam Developments, Home Innovation Builders, ABG Group, New Sensation Homes, Next, Pivotal Homes, Pindan, ABD Group and Solido Builders. .
This week another company joined the ranks, with a construction company based in Geelong Waterford Homes goes into liquidation with at least $600,000 in debt.
Thousands of jobs have already been affected – although the total number of job losses is almost impossible to calculate – as well as the dreams of future owners, and meanwhile the fate of several other leading construction companies continues to be in play.
A question mark hangs over the construction of the future of the Metricon juggernaut, despite the injection of $ 30 million into its business to allay fears about its survival and the meeting of company representatives with the Victorian government at the end of last month for crisis talks about the growing problems plaguing the sector.
Meanwhile, a Victorian building company Snowdon Developments Pty Ltd is also on the verge of collapse, with sources revealing that employees have not received their pensions since October, leading to more than half of staff quitting.
Experts agree this is likely just a taste of things to come, with research firm IBISWorld confirming this month that insolvencies are on an “uptrend” in the homebuilding industry and predicting the number of homebuilders will decline 9% in 2022-23, ‘contracting for the first time in a decade’, while NAB said construction is now the ‘most worrying’ industry of the bank’s portfolio.
And it doesn’t stop there, with construction failures also expected to have a ripple effect on other industries like plaster product manufacturing, hardware wholesale, advertising agencies and services. job placement and recruitment, according to IBISWorld, with slumps also on housing. supply and “potentially rising unit costs charged by residential real estate operators and real estate service companies”.
What caused the crisis?
The crisis is the result of a perfect storm of conditions following one another, including supply chain disruptions largely due to the pandemic, then the Russian-Ukrainian conflict, followed by labor shortages. qualified, skyrocketing material and logistics costs, and extreme weather events. .
The industry’s traditional reliance on fixed-price contracts has also seriously exacerbated the problem, with contracts being signed months before construction begins.
This meant that once a construction had started, prices had already skyrocketed, but companies were unable to renegotiate the contract with the client, leading to financial losses.
Andrew Spring of insolvency firm Jirsch Sutherland told news.com.au there had been “many signs” that trouble was brewing for the sector.
“We saw in the very beginning an increase in timber costs and problems with logistics and shipping lanes, so there were a lot of signs, and industries such as construction work on fixed price contracts and when there is a sharp increase in the cost of materials and labor, it will create losses when the contracts are executed,” he explained.
He added that ‘historically, construction has been a really difficult industry to succeed’ for a range of reasons, including an above average number of companies that have engaged in anti-competitive behavior and illegal ‘phoenixing’. , that is, when a company is liquidated to avoid paying its debts before a new company is launched to continue the same business activities without the debt.
“It’s only a small percentage of the whole construction industry, but it’s a higher percentage than other industries, and you end up with companies offering work that it’s ultimately impossible to be profitable,” he said.
“Legitimate businesses that sit in space then are really looking for revenue rather than profit because…to earn work they have to underestimate and ultimately only rack up losses over a long period – that’s why we see a lot of insolvencies.”
He said there was also a wide range of pressures beyond the industry’s control that had hit “back to back”, including soaring costs, a labor shortage and closures and Covid restrictions.
“Even when the industry came back online (after the Covid shutdowns), there was a cash flow problem due to not working for a period of four, six or eight weeks, and that created a level of desperation that led people to accept work they would not have accepted before,” he said.
“People locked themselves into whatever work they could get…and then when they started delivering work, it was already probably unprofitable due to rising labor costs. labor, materials and logistics, which meant that a company’s cash reserves were eroded.”
More recently Australia’s east coast was hit with endless rain thanks to La Nina, which Mr Spring said was “another big challenge”.
“It’s a really unique set of circumstances that came together and blindsided everyone,” he said.
“The mood has changed dramatically – we’ve seen it in our business, we advise companies and individuals who find themselves in financial difficulty and it’s been completely different in the last two months. Everyone is worried now – it looks like musical chairs, and when the music stops, some people will find themselves without a chair.
“Who knows what’s around the corner?” We didn’t predict the double flood on the east coast that was a knife in the back, and I don’t think we’ve seen the end of it yet.
Can the sector recover?
Construction and trade lawyer Nelson Arias-Alvarez of Sydney firm Eakin McCaffrey Cox told news.com.au that while increased risk of business collapse was on the horizon, many were surprised by how quickly companies retreated, and also because so many big companies had fallen.
“We certainly didn’t expect some of the big companies to sink so quickly…most people thought the writing was on the wall and something had to give, but the speed at which that happens is almost self-evident. director, because the more that happens, the less likely people are to be willing to work under contracts,” he said.
People worry and worry about who will sink next.
“The problem is the flux on the effect – what we are seeing now is really the beginning of what is likely to happen. It will intensify in a few months.
“Right now big companies have gone bankrupt and others are trying to keep their heads above water but it’s like a band aid, all that’s happening is they’re safe for the moment, but the downstream contracts are all at risk unless there is a longer-term solution.
He said there “will be” more meltdowns and the only solution was for the parties to renegotiate previous contracts and offer fairer terms, although he admitted it was a ” great demand”.
“Insisting on honoring contracts will only sink businesses,” he said.
Mr Arias-Alvarez said another “telling sign” of problems within the industry was that the state government had “parked a lot of projects right now”.
“One of the reasons is that I imagine they’re worried about what’s going to happen – are they actually going to be able to complete any projects?” he said.
“And the other thing is the shortages – the stimulus packages, more so in the residential space, have created a lot of work, but now people cannot complete the work because there is a shortage of skilled labor available.
“The government can see it and because of that the government parks projects itself. But what kind of message does this send? That doesn’t sound like the most positive message.
Mr Arias-Alvarez said he believed things would start to settle down once prices started falling again, and said project managers and owners would start to realize there would be better results if they worked with contractors and subcontractors instead of litigating contracts. problems in the current climate.
And Mr Spring said one thing that could help the industry was moving to fixed-price contracts on more flexible and fair terms.
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