How the construction industry’s problems are likely to affect you
Anyone even vaguely interested in current affairs knows that the construction industry is in diabolical trouble and that inflation, interest rates, and supply chain problems are exacerbating it. However, few people -- including those running businesses in any way associated with the sector or awaiting interminably for completion of homes and other building projects -- understand why the industry’s trauma has become theirs.
It's because a situation has developed where the Australian commercial and residential building industry has staggered into a mire of mistrust and fear which, according to Macks Advisory’s sources, poses a far more serious threat to the nation’s building activity long-term, than higher interest rates.
As the media trumpets rapidly rising insolvencies in the sector, paralysis is already setting in as many subcontractors go on what amounts to a strike. They’re hesitating to work while trying to determine which builders seem likely to collapse financially -- this in circumstances where economic conditions are threatening the subcontractors’ own solvency.
Our sources declare that unless a way can be found to restore solvency confidence in major building companies, then these businesses and all who have a financial association with them will also be bogged down in an ever widening and deepening mire of confusion and mistrust.
We understand there is a strengthening belief among industry leaders that, as was the case with banks in 2008, the Federal Government, for the good of the economy, must promptly consider some sort of credit assurance for credible builders however a lot of the issues are state based thus not subject to Federal control.
What’s been going on
Both commercial and residential contract builders have tendered on fixed prices as required under the existing banking system and Government contract conditions. However, the adequate margins and contingencies they believed they had allowed themselves, have been eroded by rising costs and the consequences of delays in supplies to an extent they’re now obviously comprehensively inadequate.
Locked thus into unviable contracts, builders are falling over like proverbial nine pins and subcontractors’ businesses become consequent insolvencies.
This collateral damage from the collapses of major building companies is extended to thousands of other people whose businesses and personal lives suffer significant disruption because projects aren’t completed or works performed with goods supplies and paid for.
The current crisis could well descend into chaos as increasing numbers of subcontractors demand payment before starting work and increasing numbers of contractors decline to make such payments because they do not have the capacity to do so.
This is because of their own precarious financial situations and knowing that some subbies paid in advance, also are teetering on the brink of insolvency are unlikely to complete work they’ve been paid for.
Looking down the track
Concurrently legions of subbies who tendered on a fixed price basis are no longer willing to complete work that will send them insolvent and aren’t prepared to tender for work in any circumstances for potentially insolvent builders. It appears that a classic vicious cycle, where contractors and subbies are suspicious of each other’s solvency, is about to become more vicious. Which is further compounded by the need to provide cash or Bank guarantees which may never be recovered.
There are builders trying to break the cycle by tendering for new work without tying subbies to it, but to do this, the prime contractor/builder must allow provisions and contingencies that will see you or anyone else considering a building project or renovation, looking at eye-watering quotes.
Accordingly, industry analysts are telling us Treasurer Jim Chalmers should be consulting ALP president Wayne Swan -- “dubbed Australia’s world champion Treasurer during the 2008 banking crisis” -- for advice on how to deal with this admittedly smaller but more worsening, complex pending building crisis.
Meanwhile it’s of heightening concern to economists that the nation has massive infrastructure projects to undertake as part of the government’s commitment to reduce carbon emissions, and it obviously has high hopes that a resurgence of immigration will provide stimulus for building and construction companies.
But these aspirations can’t be realised within specified time frames while the construction sector continues to be mired in confusion and mistrust.
A banker’s view of all this
One of the major Banks in stress testing the financial situation of customers – particularly those in the higher-risk construction sector and those whose personal and business finances are associated with it – is however broadly optimistic.
Whilst it is conceded there will be continuing defaults in construction and consumer retail sectors but they have stated that “at this stage we remain with our through-the-cycle view”.
It’s the bank’s belief, he says, that having modelled scenarios that accommodate an economic downturn and a severe economic downturn, most well-run construction/building firms, by pruning staff and applying other cost-saving measures, will in the foreseeable future survive current financial stress.
Not so, according to our sources in the industry, big banks need to – work more empathically and more regularly with building industry customers as they attempt to cope with the Reserve Bank of Australia’s (RBA’s) most aggressive interest rate hikes in 30 years.
It has been stated that from an industry perspective there have been about $100b in savings – much of it because of government stimulus during the pandemic – and so it is not expected therefore that the nation will go into recession.
That said, there’s still obviously a whole lot of trouble in the building sector causing a lot of collateral damage, the advent of which readers of this newsletter were warned about almost exactly 12 months ago in an article headed “Businesses linked to the construction industry soon to face serious trouble”.
