Around Australia, problems associated with defects that arise as a result of buildings not being constructed in accordance with the National Construction Code (NCC) and relevant Australian standards have gained increasing attention.

Now, a new analysis has shone detailed light on such defects.

Prepared by the Centre for International Economics (CIE) on commission for the  Australian Building Codes Board, the report provides an estimate of the expected costs and benefits associated with implementing all recommendations of the Building Confidence Report prepared for the Building Ministers Forum (now Building Ministers Meeting) by Professor Peter Shergold and lawyer Bronwyn Weir in 2018.

As part of its work, the CIE undertook a high-level analysis of the nature, prevalence and impacts of defects which arise out of a failure to construct buildings in accordance with the NCC.

For their analysis, the CIE:

• consulted with stakeholders, policy makers and regulators
• reviewed available evidence; and
• conducted three separate surveys of home/apartment owners, commercial building owners and managers and building practitioners.

(Note: in its analysis, the CIE separated defects caused by the initial build from those which arise out of ongoing maintenance. This was done to understand the degree to defects are occurring specifically because of construction which does not comply with the NCC.)

Key findings were as follows:

1. Building Defects Cost $2.475 billion each year

According to the report, the annual cost of defects which occur out of the initial build is estimated to be $2.475 billion.

This equates to $714 million for buildings which are classified as Class 1 under the National Construction Code (detached homes and townhouses) $1.290 billion for Class 2 buildings (multi-storey apartment complexes) and $470 million for Class 3-9 buildings (commercial and public buildings).

In its report, the CIE included costs under three categories. Costs in each category were estimated before being aggregated to derive an overall estimate.

The three categories are:

• The direct cost associated with rectification and repair. Where applicable, this includes contributions which need to be paid to the body corporate.
• The value of the time which property owners use to achieve rectification outcomes. This may include, for example, chasing up repairers, investigating problems, speaking with practitioners (including lawyers) and attending body corporate meetings.
• Other costs such as lost rental income, temporary accommodation, extra travel/transport, legal fees, technical/engineering reports, extra health care costs and other items.

2. New Detached Homes Have Almost One Defect Per Home. New Apartments Have More

Based on information from the home-owner survey referred to above, Class 1a detached homes are estimated to have 95 defects which are caused by the initial build per 100 homes. This equates to a rate of almost one defect per home.

For Class 1a townhouses and Class 2 apartments, these numbers increase to 103 and 162 defects per 100 homes respectively. This means that the average apartment has 1.62 defects which are caused by the initial build.

3. Waterproofing is the most common defect.

Across all residential buildings (Class 1 and Class 2), waterproofing is the most common defect followed by plumbing and drainage, roof and rainwater disposal and structural defects (see chart).

However, the prevalence or otherwise of each type of defect differs according to the type of dwelling involved.

In Class 1 detached houses, the most common type of defect reported relates to plumbing and drainage (17 defects per 100 dwellings) followed by roof and rainwater disposal, structural and waterproofing (see chart).

Moving up to Class 1 townhouses and Class 2 apartments, nevertheless, waterproofing emerges as the most common source of problems.

Indeed, Class 2 apartments are estimated to have 30 waterproofing defects for each 100 dwellings. This is followed by substantial a defect prevalence for plumbing and drainage, roof and rainwater disposal and structural.

4. Apartment defects cost more

On average, the report estimates the cost of rectifying defects within Class 2 apartment complexes at $9,349 per defect for each dwelling.

This declines to $3,440 and $2,842 per defect for each dwelling in detached homes and townhouses.

As noted above, the three types of costs which were considered are direct rectification costs, the cost of the owners time and other costs (see point 1 for details).

According to the CIE:

• Direct costs associated with rectification and repair are estimated at $3,440 per defect for detached homes, $2,842 per defect for townhouses and $9,349 per defect for apartments. These numbers are based on estimates from survey respondents above along with some adjustments (see report for details),
• Costs associated with owners’ time are estimated at $904 per defect for apartments, $701 per defect for detached homes and $299 per defect for townhouses. This is based on estimates from respondents to the aforementioned survey who own apartments, detached homes and townhouse that they spent an average of 46, 36 and 19 hours on defects respectively. Multiplying this by a rate of $19.55 per hour (half of the average hourly earnings for employees in Australia), the CIE arrived at the above estimates.
• Other costs are estimated at $225 per defect for detached dwellings, $503 per defect for townhouses and $1,985 per defect for apartments.

5. Flammable Cladding is the Most Expensive Defect to Rectify

For Class 2 buildings, flammable cladding is the most expensive defect to rectify.

All up, the cost of rectifying flammable cladding amounted to $34,375 per defect for each dwelling. This is followed by waterproofing, rain and wastewater disposal, structural defects and swimming pools/gym/playground defects (see table).

In detached homes, structural defects were the most expensive to fix followed by structural, swimming pools, natural light and weatherproofing. (Note: a high cost for ‘other’ in the table below related to only one respondent).

The report notes that its estimate for flammable cladding rectification costs is based largely around a singular case from the Lacrosse apartment towers in Melbourne (refer p36 of above report for details). It cautions that average costs per dwelling for other buildings may vary according to the building, the nature of the cladding and the rectification solution which is proposed.

6. Owners Usually Pay

At least in a strata setting, it appears that owners are most commonly left to wear the cost of defect rectification.

Based on a 2009 survey of strata owners from the UNSW, the CIE estimates that owners corporations and their insurers are left to cover the cost in 43 percent of cases. In a further 24 percent of cases, owners are left to take the builder or developer to court.

Only in 30 percent of cases are defects covered by builders or developers (or home warranty insurance) whilst defects remain unrectified in three percent of cases.

7: It’s Not Just About Money

Whilst the aforementioned points deal with the financial ramifications of building defects which are caused by non-compliant construction, there are other impacts in terms of safety and wellbeing.

On safety, the report notes that non-compliant construction can lead to property damage, personal injury and loss of life.

On loss of life, for instance, it estimates an average fatality rate of 2.4 people per year on account of fires which are caused by defects associated with non-compliant construction. This is based around a combination of findings from a 2019 Bushfire and Natural Hazards CRC study which found that the number of fatalities which were caused by fire in residential premises (mostly in separate homes) amounted to 48 per year over a three-year period to 2017 along with an ACIL-Allen estimate based on data from Fire and Rescue NSW which showed that design and construction flaws accounted for five percent of all fire fatalities which occurred in buildings within in that state between 2004 and 2014.

In addition, health and safety risks extend beyond risks associated with fire. Poor condensation management can lead to health concerns relating to mould. In 2017, two people were killed and 17 injured due to a balcony collapse.

Moreover, building defects can have an emotional impact upon owners. Following discovery of flammable cladding on hundreds of buildings in the UK after the Grenfell Tower collapse, a mental health survey of affected residents conducted by the UK Cladding Action Group found that:

• For 90 percent of respondents, mental health had deteriorated as a result of the cladding issues.
• Around 85 per cent of respondents had felt excessive worrying or anxiety as a direct result of cladding and/or fire safety related issues, with around 15 per cent reporting having had suicidal thoughts.
• Around 27 per cent had been formally diagnosed with a stress-related illness, including anxiety disorder (20 per cent) and depression (18 per cent).

8. Defects in Commercial and public buildings

Based on a combination of its surveys of commercial building owners and building practitioners, the CIE estimates that serious defects are present on between 41 percent and 53 percent of new buildings in commercial and public buildings.

These result in costs ranging from $260,077 per defect to $437,500 per defect to rectify respectively.

(Note: some numbers in the chart below are shown in the incorrect column. In particular, the ‘low’ estimate of for defect prevalence and cost per defect is shown at 53 percent and $437,500 per defect respectively whilst the ‘high’ estimate for defect prevalence and cost per defect is shown at 41 percent and $260,077 per defect.

Instead, the low estimate should be 41 percent for defect prevalence and $260,077 per defect for cost. The high estimate should be 53 percent for defect prevalence and $437,500 per defect for cost.)

9: Problems are created by a lack of competence, Poor Compliance and Poor Enforcement

During stakeholder consultations, the CIE asked stakeholders for their views on the extent to which a range of factors contributed to defects. These responses were assigned a score ranging from zero for a not at all response to three for a large contribution.

According to this feedback, significant factors which are believed to contribute toward defects include a lack of competence of some building practitioners, a lack of effective compliance and enforcement systems, inadequate maintenance and a lack of effective post construction information management (see chart 2.34).

Meanwhile a survey of practitioners found that a lack of effective compliance and enforcement systems was primarily to blame followed by a lack of building practitioner competence (see charts 2.35 and 2.36).

Excluding any respondents who perceived few or no defects, the number of respondents who believed that inadequate compliance and enforcement makes a large contribution to defects amounts to almost six in ten (59 percent) in the case of detached homes and 55 percent in the case of apartments.

10. Defects May be Getting Worse, Not Better

As noted in the report, several observations suggest that problems associated with defects are becoming worse.

As can be seen from chart 2.12 below, the number of defects reported by those who have owned their building for a relatively short period of four years or less is relatively high compared with that reported by those who have owned their buildings for longer. This likely indicates a greater prevalence of defects on more recently completed builds.

Another possible indication of rising defects can be seen through the increase in claims for professional indemnity insurance from building surveyors (see below) as well as a strong upward trend in claims on building and contents insurance from fire events.

Granted the report notes that the growing prevalence of defects suggested by these observations may not be entirely caused by a deterioration in NCC compliance.

Indeed, it suggests that upward trend in defect occurrence may partially reflect the rising prevalence of apartments in share of new dwelling construction. As noted above, this type of construction is more heavily defect prone compared with single storey building.

Nevertheless, the report concludes that ‘together, these indicators suggest it is plausible that the problem (defects caused by a lack of compliance with the NCC) has been increasing over time’.

11. Benefits of Action Outweigh Costs

Not surprisingly, the analysis found that the benefits of implementing all recommendations of the Building Confidence Report outweighed the expected costs by a factor of almost two to one (refer separate article).

Whereas the present value of costs associated with implementing the report’s recommendations is expected to amount to $4.729 billion over the ten years beginning in 2022, the net benefits which are anticipated from doing so are estimated at $9.009 billion.