It would be impossible not to notice the constant parade of Australian builders going out of business, often spectacularly over the last year leaving thousands of tradies and suppliers unpaid. In fact, Australia has seen the highest rate of construction insolvencies in over a decade, with nearly 30% of all company failures in the last twelve months have been in construction. Nearly all industries have felt the pinch since the pandemic, the question is, why has the construction industry been so disproportionately affected?
For the most part, it seems that supply chain pressures are pushing builders’ cash flow to capacity and for many in the industry the profit margins are simply not big enough to deal with disruptions when they arise. The industry generally operates on a 2% margin and in a time when building materials like steel and timber have increased over 20% it does not have the money to stay afloat. With the recent and major disruptions of supply chains worldwide, the Australian construction industry was forced to put up or shut up shop, and a great deal were forced to do the latter.
Of course, when these companies collapse they take a lot of hard-working Australians with them, with massive job losses and, as we saw earlier this year with Porter Davis homes, people pressured to pay non-refundable deposits in the dying hours of the company only to be left penniless, with half-built houses. To add insult to injury, the shortage of builders means that these half-houses will remain that way until owners can afford to pay the increasing upfront payments the replacement builders are demanding.
In addition, though the industry is genuinely struggling, not all construction companies’ insolvencies are due to the aforementioned issues, it is reported that some businesses are going into debt only to liquidate and reincarnate debt-free, leaving their victims to bear the costs. Taking advantage of loopholes in the system. The ABC reported on one such Sydney company, highlighting the need for greater corporate regulation and the limits of the current system dealing with insolvent companies.
However, there seems to be a light at the end of the tunnel for the Australian construction industry with the latest Cordell Construction Cost Index (CCCI) indicating a slowing of what has been two years of continuous above-average increases in the price to build. The CCCI returned a growth rate of 0.7% for the June quarter following 0.9% for Q1, these figures are a welcome result for the beleaguered industry which saw a peak growth of 4.7% in September 2022, compared to a decade-quarterly average of 1.2%. The current rates are promising and hopefully, the turning point to get the Australian building industry off the ropes in the near future.
Despite optimistic forecasts, it seems that the construction industry needs to create a more robust system to allow for future viability. Considering increased margins and secure supply chains to ensure they are able to deliver and regain the trust of the vast amount of subcontractors and vendors they burnt, once this current crisis passes.
