What’s behind our national construction crisis?

By Zilla Efrat

Australia’s building industry is in crisis with a wave of companies going into administration and more are expected to fall.

Companies such as Probuild, Condev, New Sensation Homes, Home Innovation Builders, Privium, Hotondo and Pindan have been placed in administration. And as they fall, some of their subcontractors have also hit the wall.

Building giant Metricon managed to stave off bankruptcy after receiving a big funding injection from its bank and $30 million in cash from its shareholders. Worryingly, the Association of Professional Builders’ co-founder Russ Stephens estimates that at least half of Australia’s building companies are trading insolvent or hovering on the brink of collapse.

And, according to CreditorWatch, construction presently has the worst late payment record of any industry. About 12 per cent of construction businesses are more than 60 days in arrears on their payment to suppliers.

Patrick Coghlan, the CEO at CreditorWatch, says late payment times are lengthening. “Insolvencies are increasing and there’s an expectation that they will continue to increase over the next 12 months,” he says.

So what happened?

Like other sectors of the Australian economy, the construction industry was getting back on its feet after the worst of the COVID-19 pandemic. But according to CreditorWatch, the sector has now been hit by a perfect storm of supply chain disruptions, cost blowouts and staff shortages just as inflation and interest rates are starting to rise.

Indeed, rising costs are the biggest headache for those running Australian construction companies.

Most of the 314 Australian construction executives surveyed by construction management software company Procore in March said raw materials and equipment costs were the biggest challenges they faced in the year ahead. Procore also noted that Australia was experiencing several unique cost pressures. Timber, for example, has been in short supply for two years and the bushfires, floods and record-levels of housing construction have all put extra pressure on supply.

Master Builders NSW recently reported that building material costs are now rising at their fastest rate since 1980. Right across Australia, it says the cost of materials used in house building has increased by 4.2 per cent during the March 2022 quarter and are now 15.4 per cent higher than a year ago.

Over the year to March 2022, for example, the sharpest price increases included reinforcing steel (+43.5 per cent), steel beams/sections (+41.5 per cent), structural timber (+39.2 per cent) and plywood and board (+29.8 per cent).

These unprecedented material cost rises are putting immense financial strain on builders who have signed fixed price contracts.

The war in Ukraine has also hurt. Australia imports a large amount of timber from Russia and Belarus and in particular, the engineered wood product, laminated veneered lumber, which is used as structural beams in buildings.

The war has also resulted in sharp increases in the prices of oil and gas and base metals.

Also stinging the construction industry are the labour shortages that followed a two-year pause on skilled migration because of COVID-19.

Research by NAB in January found that trade workers were the most common type of labour shortage, according to around one in three Australian firms.

Supply chain issues and poor weather in NSW and Queensland have also reportedly worsened the late delivery of building supplies across the country.

Another factor is the tyranny of distance. For example, Master Builders NSW says the costs to ship a 40-foot container from Shanghai to Sydney more than doubled in 2021.

Sadly, many of the above challenges are not expected to disappear soon and there are still many nights of worry for those in the building industry.

If you are feeling similar stresses to those in the building industry, please give us a call to see how we can help.

Feel free to contact us for anything that relates to your business finances so we can help with your success.

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