Construction industry ‘on collision course with insolvency’

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The construction industry is hostage to fixed-price contracts signed months ago that will drive many builders into insolvency, CPA Australia’s head of SMEs has said.

Strong economic headwinds combined with material shortages had banished certainty and trapped builders between rising prices and diminished access to financing, Kristen Beadle said.

She said CPA Australia members had spoken of cost-pressed builders amid renovations trying to renegotiate to cover rising prices, only to find owners constrained by loan-to-assessment ratios or their inability to repay a larger loan with rising interest rates. .

The amounts at stake were often huge — tens of thousands of dollars — and insolvencies would have a domino effect, she said.

“Most building contracts are fixed price and that makes the loan process easier so owners can go to a lender and say, ‘That’ss going to cost this amount to build”, Mrs said Beadle.

“But everyonemargins are tightening and the grease that was built into those contracts has all but disappeared overnight.

“Access to building materials is drying up, the cost of building materials is rising, there are other inflationary costs in the economy. Then, when you finally get something on your job site, there’s not enough manpower to put it up.

She said recent figures from CreditorWatch suggesting the construction industry had a lower risk of default than other sectors – such as food and drink – were likely skewed by government construction plans.

“They will always want their hospital built because there iss an expectation of a policy that theysaid theywill deliver, Mrs said Beadle.

“It’s in this residential space – mom and dad. The average consumer says build our house and builders say we can’t do it anymore in today’s environment…we need more money.

“But there was a contract signed and that’s the problem.

“These things could have been done six months ago, even three months ago, and we certainly weren’tt in accelerated inflation at the time. We were probably on a bit of a break because we were approaching an election.

She said economic conditions were exacerbated by the global conflict which was straining the supply of building materials, with crucial Russian structural timber no longer available and Ukraine being the source of 30% of timber for pallets. .

“Everything that’s moved is on a pallet, basically. So effectively you’re only moving two-thirds of what we were moving before Ukraine, Mrs said Beadle.

She said that while not all builders were vulnerable, the insolvency figures were lower than reality and a glitch anywhere in the system could have a disastrous impact on trades and professions dependent on the construction.

“Those kinds of things affect the economy. YouWe have plumbers, carpenters, electricians, cabinet makers, kitchen designers, architects – all of these people in this supply chain, Mrs said Beadle.

“I was talking to a liquidator yesterday and he was named on a decent sized builder. He said out of his pool of unsecured creditors of about $17 million, one of the creditors had already gone into liquidation because that he was so dependent on his business which is under external administration, and others were already talking to people about insolvency.

“Thisit’s not going to get better in the short term. Usually, insolvency drags on for a long time. When you have a major trigger point, six months is usually when it happens. So even though we are seeing a slight increase in thiss happening now, you’ll likely still see insolvencies disappear from the market.

Builders should build higher margins or CPI adjustments into contracts as collateral, she said, although that would cause funding problems.

However, state governments could rethink how they regulate builder licenses to suspend automatic cancellation when appointing an administrator. This would give a builder the chance to do exceptional work and the company the opportunity to restructure.

“YouYou have these federal insolvency laws that everyone should be able to access, but because youare a builder, and you hold a state license, you cant,” she said.

“So they don’t have options. You should be able to restructure becauses how federal legislation is drafted. And thatdoes not currently allow them to do so.

Construction industry ‘on collision course with insolvency’

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Last updated: July 13, 2022

Posted: July 14, 2022

Philip King

Philip King

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Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, information and educational content for professionals in the accountancy and SMSF industries.

Philip joined the titles in March 2022 and brings extensive experience from various roles at The Australian national broadsheet daily, most recently as Automotive Editor. His background also includes spells in various consumer and trade magazines.

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