Dirty little secret: why so many building companies are going broke

The construction sector’s business model was broken and it needed government and private sector to rewrite contracts to include price increases, according to the industry.

Mar 27, 2023, updated Mar 27, 2023
Queensland's unemployment level masks the real picture (Image: Probuild).

Queensland's unemployment level masks the real picture (Image: Probuild).

The industry has seen some high profile failures in the past year in both the residential and commercial sectors.

The reasons had been varied but a constant complaint has been the rising costs of materials which had escalated quickly and left companies in the middle of loss-making projects.

The Australian Constructors Association said cost escalation was the biggest issue facing the construction industry last year and while good progress had been made to set the industry up for future projects, “the here and now was still a major concern”.

“We’re calling for government and private sector clients alike to review their contracts and include a price adjustment mechanism for price changes outside the control of the contractor. The nation cannot afford for the construction industry to continue its current course,” the association said.

“It’s a costly game for everyone. Administrators are learning construction’s dirty little secret: the commercial model for major construction projects is broken and not benefitting anybody, least of all the industry itself.

“The nature of construction is that contractors and subcontractors price projects months before actual costs are known. They are given only a few months to quantify complex risks on multi-billion-dollar projects and unsurprisingly, despite their best efforts, there is often a difference between the initial budget and the actual cost. In the current inflation environment, that difference can be huge.”

The association said constructors do build some “fat’’ into their budgets to account for possible price rises, but when it came to tendering, clients wanted lowest price.

“This sets up a perverse incentive for contractors to build in as little fat as possible to keep their bid as low as possible and give themselves the best chance of winning,” the association said.

“In effect, the winning bid is the one willing to take the biggest gamble on the risk outcome. At any point in the cycle, there is always someone willing to take a less-than-prudent risk. So we get a race to the bottom, non-existent profit margins, and an adversarial approach to contract management.

“No wonder construction firms account for 26 per cent of administrations on a share of only 17 per cent of all businesses. No wonder that construction productivity is worse now than it was 30 years ago. It’s a brutish game of survival when it should be about producing the best possible infrastructure for the taxpayer.

“A focus on lowest cost at the tender box has increased insolvency levels to record highs and reduced competition at all levels in the industry.

“Value for money to the taxpayer is more than just the lowest initial price for a project. It is this mentality, at all levels of government and in the private sector, that has driven the race to the bottom that sees the industry in such a poor state of health.”


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