Australia’s building industry has faced growing challenges over recent years.

Insolvencies and financial difficulties are becoming increasingly common. Builders are struggling with unsustainably low profit margins – often as low as between 1.5 and 3 percent.

Several factors have contributed to this. These include fixed price contracts, the Ukraine war, builders’ warranty insurance, cost escalations, and outdated government policies.

COVID 19 of course was a contributing factor. This and the stimulus package have shone a light on many of the other factors which are affecting our industry.

Fixed price contracts are a major issue for builders. These contracts require builders to complete projects at a predetermined price irrespective of any unforeseen circumstances. These unforeseen matters can include the Ukraine war, changes in the cost of materials, supply chain issues, builders warranty insurance, shortages of skilled trades and the huge increase in labour costs.

This puts immense pressure on builders to deliver projects within already tight budgets. It often leads to loss and or cost-cutting measures that can compromise quality and profitability.

The Ukraine war has had a significant impact on the building industry globally. The conflict has disrupted supply chains and caused price fluctuations in key construction materials such as steel and timber. Builders have had to deal with these increased costs and delays due to supply chain disruptions. This has further compressed already thin margins.

Another contributing factor is the builders warranty insurance regime. This is required in most jurisdictions to protect homeowners against incomplete or defective work. Whilst this is essential for consumer protection, many consumers are surprised to find the level of protection which it affords is far more restricted compared with that offered by many other insurance products.

For example, the insurance can be claimed only when the builder dies, disappears, becomes bankrupt or insolvent or fails to comply with an order of a court or tribunal. In addition, the maximum payout under the scheme is limited to only 20 percent of the value of the original contract.

Whilst some form of protection is necessary, the value of this system is questionable. Indeed, Tasmania removed it completely and has not experienced any adverse consequences.

For builders, the insurance not only adds an additional burden in terms of premiums but often restricts their annual turnover. This occurs as policies are subject to turnover limits as decided upon by the insurer. These limits restrict the ability of builders to grow their business, eat further into already slim margins and further undermine builder viability.

The insurance regime we have today was the brainchild of the Housing Industry Association following the collapse of major insurance firm HIH in 2001.  In response to a significant backlash, commercial builders were excluded from the scheme whilst concessions were made to large domestic builders. This left small and medium builders to take the brunt of the unsavoury scheme. The commercial builders were to participate in some other scheme at a later point in time. That, however, never eventuated.

As a result of the commercial builder relief from the consumer protection regime in 2003, we have seen a steady increase in substandard building by that sector that has demeaned whole of the industry. One recent university review suggested 98 percent of the dwellings they produce suffer from building defects.

This result in the commercial sector demonstrates the fact we must have consumer protection for all as most builders are incapable of self-regulation.

Cost escalation has played a major role in the industry’s challenges. During COVID, the cost of construction materials escalated at a rate not seen before. Labour costs have been steadily rising over the years, and more recently far outpacing inflation rates. In most cases, builders are unable to pass these increased costs onto clients due to the fixed price contracts that don’t have escalation clauses in them.

As a result, they are left to absorb these additional costs. This has further eroded what was left of their profitability.

The Commonwealth HomeBuilder incentive package was introduced at a time when the industry was already overheated and has had unintended consequences. The package aimed to boost the economy and stimulate construction activity through various incentives and grants. However, it led to a surge in demand for building services and further exacerbated labour shortages and supply chain disruptions. This sudden increase in demand put additional strain on builders, who struggled to keep up with the workload while maintaining profitability.

Many builders saw the stimulus package as a means to an end and took on extra work. Many who did this believed that the additional income would maintain their cashflow. When making such calculations, however, these builders failed to give sufficient consideration to all the other issues such as trade shortages.

Other builders saw greed in the program and took on more work than what their businesses were equipped to handle.

The level of builder insolvencies of recent times has surpassed any records kept.  According to ASIC, some 2117 builders entered administration or insolvency in the last financial year. This includes Porter Davis, who were one of the industry’s major builders and whose bankruptcy impacted thousands of homeowners, suppliers, and contractors.

Such a failure has significant ramifications. Even those who held warranty insurance policies are finding the payout may not be sufficient to complete homes. This has placed homeowners in financial peril.

Then we have those who paid deposits some who paid the day before Porter Davis entered administration only to find the builder did not purchase warranty policies for those consumers which is required by law.

Initially, it was thought all those consumers had lost their money. Fortunately, the Victorian Government has stepped up and said they would provide money to help cover these people. Whilst this was welcome and necessary, it has left Victorian taxpayers to cover the illegal conduct of this disgraced company.

Whilst consumers have received assistance, spare a thought for those contractors and subcontractors who are unlikely to see any of the tens of thousands of dollars they are owed. Many of these will have no alternative other than insolvency as a result of the Porter Davis debacle.

Any builder failure directly impacts on whole of industry and the economy.

It is difficult to predict whether or not we have seen the worst of these challenges. However, it is reasonable to assume the insolvencies will continue for some time.

While some factors may stabilise or improve over time, others may continue to pose obstacles. For example, fixed price contracts are deeply ingrained in the industry. It may require substantial changes in contractual practices to alleviate their impact on builders’ profitability. Similarly, geopolitical conflicts like the Ukrainian war can have long-lasting effects on global supply chains.

To address these issues and ensure the sustainability of the building industry, a comprehensive approach is needed. Overall change is desperately required to the whole system of building and the way we should approach it. This could include reforms in contract practices to allow for more flexibility in pricing, government support for training and development of skilled labour, and measures to stabilise material costs and supply chains. Additionally, ongoing monitoring and assessment of government stimulation packages can help prevent unintended consequences and ensure they are implemented when required and at appropriate times.

Regulation and compliance require a complete overhaul. Some builders see the system as capable of only delivering a smack on the back of the hand for non-compliance. Meanwhile, consumers see the system as inadequate and incapable of delivering any form of justice from any of the entities.

In conclusion, the building industry is facing significant challenges. Factors such as fixed price contracts, the Ukrainian war, builders’ warranty insurance, cost escalation and government policies have all contributed to this situation.

Whether or not we have seen the worst of conditions is not yet clear.

However, addressing these issues will require a comprehensive approach involving various stakeholders.

In tandem, building industry consumers have been ignored. Only the recent government bailout has quietened their voice but that has still left most with situations and commitments that cannot even remotely be considered acceptable.

Consumer protection for the building industry is essential. But must encompass the whole of industry. All builders operate under the one code and therefor should be required to provide consumer protection for every home built whether it’s an apartment, townhouse, or house. There must not be any concessions, exclusions for anyone. It must be one in all in.

Then there are questions about how we are going to deliver upon the housing requirements associated with immigration. We have escalated the immigration program to unprecedented levels. Who is going to house all these people? We can’t even manage the level of housing required at this time let alone the cater for the numbers, we will see through the immigration program over the next year.

It was only a few years ago we saw public housing at 11 percent of what we were building. Today, it is only 1 percent. How is this currently fractured industry going to have any hope of delivering what will be required in terms of new housing over the next few years?

Will the industry survive? Yes, of course it will. But recovery will be slow and painful even if dramatic changes are implemented immediately.

Many years of neglect will take a number of years to recover from. Initially, it will take the will of government to implement the changes required for any meaningful change to be effective in the short term.

Without this, the industry can only waffle and any opportunity for reform will be squandered.

Phil Dwyer is one of Australia’s most respected property & construction professionals.

Phil has held the position of President of the Builders Collective of Australia for just on two decades working with both consumers and builders to improve the construction industry.

Over almost 40 years, Phil has led the building industry by example winning national awards for his own constructions at Dwyer Builders and also gained the plaudits of fellow industry leaders, the media, consumers as well as State and Federal governments for his tireless efforts in the construction industry. 

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