3rd May, 2022
Australia’s construction industry is going through a point of inflection, with several high-profile insolvencies and collapses indicative of significant disruption.
Over the past few months, Australia has seen the collapse of several major building providers, including Condev, Probuild, Privum, Hotondo Homes, Hone Innovation Builders and New Sensation Homes, with experts predicting that this could be the “tip of the iceberg.”
Association of Professional Builders co-founder Russ Stephens recently made an estimation that as much as 50 percent of Australian building companies were currently trading insolvent and were at imminent risk of collapse.
This follows predictions going back as far as 12 months that Australian businesses are yet to see the full extent of the impact from COVID-era support and stimulus measures, which have caused some businesses to take on more debt than is sustainable in the long term.
The results of a Master Builders survey from early 2020 indicated an average reduction of forward bookings across all construction industry sectors of around 40 percent caused by border closures, lockdowns and booking cancellations.
Since then, building projects have continued to suffer from higher than usual levels of uncertainty and delays, likely exacerbated by the rising costs of goods and resources (which were on the rise long before the onset of the pandemic).
Recent supply chain issues and lack of stock from national and international sources have led to a spike in demand and prices for materials, creating what some experts have described as a ‘perfect storm’ for disaster.
“I don’t think a lot of companies are taking the cost increases seriously,” Matthew Mackey, Executive Director of engineering company Arcadis, told Daily Mail Australia.
“Smaller businesses don’t have the cashflow, they don’t have the same safety net. They’re going to feel the pain a lot sooner and a lot more harshly.”
Head of Australian Apartment Advocacy, Samantha Reece said that, while the nexus of inflationary pressures may be unprecedented, blaming the situation solely on a supply chain crunch was also misguided.
Reece said the industry has long worked on razor-thin profit margins, making it vulnerable to financial shocks such as sudden hikes in energy, material and labour costs amid COVID-19 and the war in Ukraine.
The far-flung impacts of COVID-19 and subsequent border closures were always going to cause private-sector pains. Whether it’s from people out of work or a lack of international visitors, spending growth was set to take a hit, and this has knock-on effects far beyond the immediate impact.
Many would have expected the construction industry to be more resilient to these kinds of impacts and, in fact, the sector seemed to be faring fairly well throughout 2020 and 2021, driven by a combination of government infrastructure spending and homeowners ploughing available savings into home renovations.
A report by Research and Markets noted that construction activities in Victoria, while lower than expected before the pandemic, have actually been the largest in Australia during the pandemic period, predominantly driven by the infrastructure sector, which recorded a growth of 12 percent to over $5 billion during the September quarter.
The report notes that during Q3 2021, Victoria recorded a growth of 5.8 percent in the construction sector as opposed to a sharp fall recorded in NSW and ACT.
According to the Australian Bureau of Statistics, NSW recorded an eight percent decline to $14.9 billion, whereas the output in ACT declined 15.5 percent to $778 million due to the pandemic.
While there’s a lot of doom and gloom being reported about the industry, experts feel Australia’s ongoing infrastructure investments will help this sector recover, even if there are some more high-profile insolvencies still ahead of us.
Cashflow is the key to business resilience during times of volatility or adversity. Those construction outfits that have gone under in recent times have likely been tripped up by not planning for significant fluctuations in material costs and delivery delays.
H+M Industrial EPC notes that the early stages of the capital project lifecycle heavily influence a project’s outcome, and that cost and schedule are the two most important factors that can be significantly improved during pre-project planning in construction.
According to Association of Professional Builders co-founder Russ Stephens, many building companies have gotten into trouble because they collected advance payments to complete houses – meaning they were showing a healthy bank balance – but had not factored in any changes to timelines, or costs associated with completing projects.
He also noted escalation clauses needed to be used more commonly in building contracts, acknowledging this also means passing additional costs to consumers, rather than these solely landing on the industry businesses or trade workers.
According to the Construction Industry Institute, well-performed pre-project planning can reduce total project design and construction costs by as much as 20 percent and minimise the total project design and construction schedule by 39 percent against the authorised estimates.
Cost and schedule are usually very dependent on one another, so often a significant change or error in either of them often affects both.
It’s clear the final profitability of the project relies on a carefully prepared and anticipated budget allocation in combination with a properly managed timeline. It should therefore come as no surprise that more and more companies are looking for ways to prepare themselves better in case of further inflation or supply chain issues.
And the technology exists to make all of this work much simpler. Using a cloud-based enterprise resource planning (ERP) system to track time, costs and expenses of each part of the construction process will help businesses stay on top of profit margins, prepare for any upcoming invoices and manage any potential delays.