Why do Construction Companies Keep Falling Over?

Barely a day goes by without a heartbreaking story of a young couple losing their life savings as their builder goes bust. 

Porter Davis, Condev, Snowden, National Projects and Pivotal Homes.

These are just a few of the big names to have collapsed. 

And many smaller builders have joined them.

According to the Australian Securities and Investments Commission (ASIC), between July 2022 and June 2023, 2213 construction companies entered administration. 

That’s almost 40 a week! The numbers around this financial disaster are truly staggering. 

Nearly 28% of all the insolvencies across all industries in the past year and 30.5% this year were in the construction sector.

And the number of insolvencies across the country surged to its highest level since 2015, with construction count for almost 1 in every 3. 

Even construction giant Hutchinson Builders reported a 93% fall in net profits. And this was after a $500 million increase in revenue. Chairman Scott Hutchinson expects no profits this coming financial year either. 

So, what caused a once-dominant industry to suffer such a monumental collapse?

There are a number of reasons. However, they mainly start with Covid. 

Normally the building construction industry operates with a 10% profit margin. And that’s super slim to begin with. 

But that’s OK as long as everything is stable and there aren’t any nasty surprises. 

Except when Covid hit, it unleashed havoc.

First, China shut down entire industries, and the price of building materials went through the roof. That was if you could get them at all. 

Price rises for timber soared 60% and higher. And prices for other commodities doubled almost overnight. Builders who were lucky enough to have materials, were suddenly running at huge losses. 

Then Australia went into lockdown which meant building slowed to a crawl. While the industry continued to operate in a limited fashion, rules around ‘close contact’ meant workers were off when they had Covid, or someone on the building site had Covid, or even when someone in their family had Covid. 

Then the industry tried to catch-up at the same time as construction workers left to do other jobs. And the labour price went through the roof. 

For a while, entire jobs were put on hold until the builder was certain they had all the resources lined up. 

Then to cap it all off, a severe La Nina weather system hit the country for 2 years, seeing building sites washed out with works on hold for months. 

And if that wasn’t bad enough …

… these builders were on fixed price contracts.

What this meant was a house build they quoted $300,000 suddenly blew out to over $400,000. 

And they couldn’t go back to their clients and ask for more money to help cover their (now) massive shortfall. 

They had to somehow make do. 

And the way many of them did it was simple. 

They signed more contracts with clients, using the new deposits to keep the existing builds going in the hope the industry would turn a corner and they’d scrape through. 

Which they didn’t. 

To make it worse, schemes such as the HomeBuilder scheme saw builders desperately slashing their prices even further to sign up new clients to try and survive.

And many simply loaded themselves up with work they had no chance of ever completing. 

Instead the companies collapsed under the weight of all the debts. 

The Porter Davis collapse left 1,700 homes incomplete, although another builder has since stepped in and has completed some of them. 

However there remains a huge number of incomplete homes across the country, forcing owners to continue renting and pushing up rents further. 

And for those who survived?

It also left a huge scar on the building industry, with many building companies unable to invest in the necessary capital to adopt new and innovative construction methods. 

Or to even upgrade their ageing equipment. 

But it has left an even deeper scar on the people affected. 

Home owners have lost their life savings on building projects which have been left to rot in the rain. 

Many will recover, but at the cost of years of wasted time not living in their new home. 

And facing higher costs to start again. 

The strain on the families and relationships has been unimaginable. 

Yet the pain isn’t all on one side of the fence. 

Building company owners faced years of stress trying to keep their businesses afloat, they have suffered the embarrassment and turmoil of losing everything they gave blood, sweat and tears to build. 

And tradies and employees have been left out of pocket, sometimes facing bankruptcy themselves as they realise they will never be paid the money, sometimes tens of thousands of dollars they are owed. 

Mental health issues have spared no-one. 

So, where are we now?

The good news is we’re likely nearing the end of this. 

Builders are now adjusting pricing for new projects to more realistic levels. And previous, unprofitable builds are working their way through the system. 

The government has also been tightening regulation in the industry to stop companies getting out of control. 

However, the lingering effects of this financial catastrophe are likely to remain a while longer and more companies are expected to fall before it’s over. 

This is why we suggest you conduct proper checks before putting your money in with a builder. It’s something we’ve always done and will continue to do. 

At a minimum, you should:

• Get referrals from past clients of a builder before signing with them
• Ensure you have full insurance, regardless of your builder’s reputation. And obtain independent advice to make sure everything is covered
• Never pay for incomplete work, and only pay in stages
• Have a surveyor inspect all completed work before signing off on each stage. 

This has been a very challenging time for everyone. 

And while the impact on supply has worked in favour of investors, it’s not a situation anyone would wish on the many victims of the collapses which have hit the industry.