We are constantly informed and reminded of major state or federal infrastructure or building projects that have overrun both financial budgets and completion dates. The other spectrum in building is that we constantly hear of residential builders entering administration and liquidation leaving thousands of home buyers and renovation clients at financial and emotional crossroads beyond their worst nightmares.
news.com.au has reported that 2,349 construction firms have collapsed in the past year with more to come, and that of the 8471 business collapses for 2023, almost 28 per cent were in the building and construction industry. This equates to thousands of unfinished new homes and renovations at a time when housing numbers needed and population growth are at polar opposites. A fair question would be why are all these builders getting into financial difficulties when they have so much work? Why did so many builders suffer at the beginning of the GFC following the absolute boom up to 2007-08 and now after the Covid building boom when many of their present contracts were being signed?
We are constantly being lectured to by the Albanese government that we need more migration because of a skill shortage, especially in the building industry. In my opinion, this is not correct. So many skilled subcontractors e.g. concreters, bricklayers, carpenters, plasterers, plumbers, electricians etc, etc, and their hundreds of thousands of employees, with their massive experience collectively, have been put into financial strain and worse because so many builders have folded. Many of these subcontractors (building workers), have opted to not pursue work from building contractors and have found work from the private sector, government contracts, or use their skills and knowledge to specialise. Many other subcontractors and their tradie employees have found work with the large union-aligned building companies contracted to government work. And why not when the starting salary on some of these union jobs is $204K and the hours and days off make their new jobs look like a holiday camp compared to their former jobs in the private sector.
So when media reports that residential contracts are taking longer to complete due to a skill shortage and the Albanese government uses this to justify the need for more migration, we are not getting the full story and the equation between population growth and housing becomes greater. The industrial relations bills introduced by Tony Burke and the unsolicited powers of the unions on building projects have stolen the aspiration of young tradies to work for themselves and for traditional subbies to want to work for builders. Therefore the pool of traditional subcontractors that builders traditionally had access to has greatly diminished and because of this thinner-spread projects take longer. That does not justify the comments of “Skills Shortage”, but rather the unwillingness to perform work in the residential housing market.
However, we can not place all the blame on the current government. Before the Domestic Building Contract Act was introduced in the mid-1990s in Victoria and then copied by most of the other states, standard industry residential building contracts had loss adjustment or rise and fall clauses. These clauses were set to allow for problematic price increase in labour and materials where such increases were well beyond the control of the builder. These clauses are no longer in residential building contracts and have been replaced by the current Fixed Price Building Contract, so therefore the builder takes all the risk. Once a builder has signed a fixed-price contract with an owner, the contract price can only be increased during the works with the agreement of the owner if there are variations to the works, or if the provisional sum or price cost estimates have been exceeded.
Most builders use very specific and up-to-date software packages for calculating prices on proposed building contracts which is readily apparent when comparing similar-sized display homes or viewing multiple tenders on stand-alone projects. In most cases the estimates are almost down to the last nail or brick. After the estimated quantities and labour are calculated the builder or the estimator adds a markup or profit. The general rule is about 10 per cent and this then becomes the final figure in the fixed-price building contract the builder is proposing to sign.
Building booms should be the times when builders make hay to get over the leaner periods but this has not been the case for a very long time. Building booms tend to create shortages of supply for most materials and labour and this in turn escalates prices. With the current form of residential building contracts the builder is the only stakeholder among the many entities participating in the construction of the project, to bear the full financial risk of the cost increases. All this seems most acceptable to owners, designers, financiers, politicians, and state licensing boards until finances go pear-shaped for the builder, and even then the builder is the only person at blame.
As a former builder and someone still involved with the industry, I am constantly receiving emails from major suppliers of impending price increases and during boon times these can be on monthly if not fortnightly basis. So going back to the general rule of the builder’s mark-up and then comparing this to cost escalation, materials and labour only have to increase by 11 per cent for the builder to be financially compromised and if taken in a generous time period of 6 months from pricing to handing over the completed project, that price increase total is very likely to have occurred. As soon as those cost increases exceed the mark up the builder is in trouble and when this is compounded by several concurrent projects to hundreds of concurrent projects (depending on the size of the builder), the size of the financial stress rises very, very rapidly.
It is a well known that Fixed Price Building Contracts are the major cause for builders getting into financial difficulties and although some media has highlighted this, most media coverage is on sensationalising the fact that another builder has gone into administration leaving so many owners with unfinished houses, rather than addressing the ongoing cause. The industry is not only losing the traditional workers because they are not happy in that part of the industry but also and probably more importantly, the thousands of builders with their knowledge and experience who are forced out of the industry. These are the people who train and apprentice young people to the trade but are now banned by their state licensing boards from further trading as a builder.
The bureaucrats that run state licensing boards are not on the side of the builders they dictate to.
Any other person who enters into bankruptcy is discharged from that bankruptcy after three years and receives a letter from the Australian government stating so. For a builder to re-apply for a builder’s license in Queensland, he or she has to wait five years. However, if a builder has a company that goes into administration and then personally goes bankrupt because of the guarantees committed to the company then that builder is banned for life. Committing other crimes like murder, manslaughter, rape or theft are all serious crimes but you serve the sentence and are free to rejoin society. Not so for builders. It is high time governments state and federal stop using the skilled labour shortage slogan to justify overwhelming immigration numbers and to change the core issue that affects the housing crisis nationally. The building of a new residence involves numerous stakeholders and cost increases that are beyond the control of the stakeholders must be shared.
