The factors accelerating Australia’s construction crisis

Australia’s building industry is in crisis. A wave of companies are already going into administration and more are expected to fall.

Companies such as Probuild, Condev, New Sensation Homes, Home Innovation Builders, Privium, Hotondo and Pindan have been placed in administration. And as they fall, some of their subcontractors have also hit the wall.

Building giant Metricon managed to stave off bankruptcy - but only after receiving a big funding injection from its bank and $30 million in cash from its shareholders. 

Worryingly, the Association of Professional Builders’ co-founder Russ Stephens estimates that at least half of Australia’s building companies are trading insolvent or hovering on the brink of collapse.

And, according to CreditorWatch, construction presently has the worst late payment record of any industry. About 12 percent of construction businesses are more than 60 days in arrears on their payment to suppliers.

Patrick Coghlan, the CEO at CreditorWatch, says late payment times are lengthening. “Insolvencies are increasing and there’s an expectation that they will continue to increase over the next 12 months,” he says.

So what happened?

Like other sectors of the Australian economy, the construction industry was getting back on its feet after the worst of the COVID-19 pandemic. But according to CreditorWatch, the sector has now been hit by a perfect storm of supply chain disruptions, cost blowouts and staff shortages just as inflation and interest rates are starting to rise.

Rising costs are the biggest headache for those running Australian construction companies, closely followed by shortages.

Most of the 314 Australian construction executives surveyed by construction management software company Procore in March said raw materials and equipment costs were the biggest challenges they faced in the year ahead. 

Local materials shortages

Procore also noted that Australia was experiencing several unique cost pressures. Timber, for example, has been in short supply for two years, and the bushfires, floods and record levels of housing construction have all put extra pressure on supply.

Master Builders NSW recently reported that building material costs are now rising at their fastest rate since 1980. Right across Australia, it says, the cost of materials used in house building has increased by 4.2 per cent during the March 2022 quarter and material costs are now 15.4 percent higher than a year ago.

Over the year to March 2022, for example, the sharpest price increases included:

• reinforcing steel (+43.5 per cent), 
• steel beams/sections (+41.5 per cent), 
• structural timber (+39.2 per cent) and 
• plywood and board (+29.8 per cent).

These unprecedented material cost rises are putting immense financial strain on builders who have signed fixed price contracts.

Russia and Ukraine

The war in Ukraine has also hurt. Australia imports a large amount of timber from Russia and Belarus. In particular, we import engineered wood products such as  laminated veneered timber, which is used as structural beams in buildings.

The war has also resulted in sharp increases in the prices of oil and gas and base metals.

COVID-multiplied labour shortages

Also stinging the construction industry are the labour shortages that followed a two-year pause on skilled migration because of COVID-19.

Research by NAB in January found that trade workers were the most common type of labour shortage, according to around one in three Australian firms.

Local and international delivery interruptions

Supply chain issues and poor weather in NSW and Queensland have also reportedly worsened the late delivery of building supplies across the country.

Another factor is the tyranny of distance. For example, Master Builders NSW says the costs to ship a 40-foot container from Shanghai to Sydney more than doubled in 2021.

Sadly, many of the above challenges are not expected to disappear soon and there are still many nights of worry for those in the building industry.

The challenges are many AND navigable

The construction industry overall isn’t likely to fail. People still need homes. Manufacturers still need factories.

 Master Builders Australia expect short term growth in public construction such as hospitals and schools.  While the housing market may drop in the short term, Australia is still short on housing and post-COVID immigration is scaling - so long term construction growth is still expected.

Strategic cash flow management is fundamental

Not every current construction business will make it through today’s challenges.  The businesses that survive the storms will likely be those who get strategic about their cash flow management  - the businesses that develop their capacity to think like a CFO rather than a bookkeeper.

The ability to be dispassionate and strategic about financing your business will be fundamental to navigating these multiple challenges - both in construction and a range of sectors.

If you need to level up your financial management game (and fast) then talk to our Working Capital and Cash Flow Strategist Martin Cattach today.

Book a discussion on working capital and funding options on zoom now.

(Adapted from a recent article by  Zilla Efrat, with permission)