‘On a tightrope’: Construction sector is cracking under pressure

If there is one construction site in Australia showing the economic slack in the construction industry, it is the Ribbon project in Sydney’s Darling Harbor.

Shrouded in glass and jutting out between two arms of the Western Distributor that winds through the city’s CBD, the development of the hotel and entertainment district has been burnt down by two builders in just two years.

After the first builder on the site, Melbourne’s Grocon, collapsed in late 2019, Melbourne-based co-builder Probuild took over the task of bringing in administrators earlier this year as cost pressures started to bite into his business.

On a bright spot of the news, The age and Sydney Morning Herald can reveal Multiplex has taken over the Ribbon project and work will resume on the site this week, as Probuild’s South African parent company considers a rescue package to revive what’s left of its business after the sale process .

Despite these postponements, the industry is teetering towards crisis and operators across the country are already under pressure from rising steel and timber costs, supply chain delays and labor shortages. There is a real fear that interest rate hikes will push more groups over the edge in the coming year.

At the end of last month, the country’s largest home builder Metricon emergency meeting held with the Victorian and NSW state governments before entering into a new financing deal with its shareholders and bankers as it struggled to contain losses on contracts it had entered into with customers before raw material costs rose significantly.

At the same time, a major infrastructure rollout is eating up merchants and other skilled workers, further increasing labor costs for housing and commercial builders.

Other home builders and large groups of subcontractors would also be the victims. This weekBoth ANZ chief executive Shayne Elliott and NAB chief Ross McEwan warned there would be more pain in an industry that generates 9 percent of the country’s gross domestic product, or $360 billion in revenue.

Nigel Satterley, a Perth residential developer, said the west of the country was facing a dire shortage of truck drivers, machinists, plumbers and haulers.

His company, Satterley Property Group, is also facing supply constraints in Victoria and Queensland, where it also has extensive land developments.

“In Melbourne the contractors are much better equipped than in Perth, although everything is tight in Melbourne too,” he says.

About 34,000 land plots were sold last year in the growth suburbs of Melbourne and Geelong. “We think the industry can only build about 20,000 a year, so there’s a bit of indigestion to get there,” he says.

Satterley isn’t alone in sharing industry concerns. A senior executive at one of the largest development groups in the country, who will not be named for business reasons, believes there will be more pain in the sector.

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“We are seeing the end of a cycle that has been going on for 15 years. Now it is a cleansing and unfortunately there will be losers. Things will have to be priced accordingly. Projects are being suspended because the numbers are just not right now.”

Experts point to more pain in the sector as groups reassess project finances as inflationary pressures, supply chain disruptions and labor shortages begin to mount.

“Resources, sourcing, logistics challenges are all real issues. It’s an industry with a low-margin culture,” said Marc Colella, industry director at global engineering and consulting firm Aecom.

That means there’s no fat in the system if costs start to rise and labor markets come under pressure, he says.

“It’s definitely putting those larger projects under a significant amount of pressure with the escalation we’re experiencing in commerce and also in the supply chain.”

Smaller home builders with three or four projects, who signed a permanent contract one or two years ago, are most at risk, Colella says.

“If you look at the domestic scale, I think the challenges there are even greater because the systems and supply chains are not that advanced.

“I think they are probably more threatened because their financial support is limited and they are not as diverse.

Colella says there is less risk for the larger and more sophisticated national and international contractors because they have more diversity and contingencies, but there is still a lot of pressure.

“While the government is still stimulating the construction market, especially for infrastructure projects, I don’t see any relief in the near future. We are still a few years away from the re-settlement industry,” he says.

The pressure is not only felt by contractors, but is spreading to all stakeholders, financiers, designers and engineers.

“The design and construction industry has depended on the growth of specialist talent and skills through immigration. We are now experiencing a significant skills shortage due to the border closures during the pandemic, in a market experiencing historically high infrastructure investment, so coupled with cost escalation and supply chain pressures, it could be considered a perfect storm.” colella. say.

Ted Fitzgerald, a partner at KordaMentha’s real estate consultancy and an expert in the construction industry, says developers are starting to ask harder questions of their builders to make sure they’re protected from any collapse.

“Developers are looking for builders with more robust parent company balance sheets and guarantees so they can be sure that the unlimited liability that the builder is signing up for can be met because when the builder goes into liquidation, the developer must the extra costs,” says Fitzgerald.

At the same time, he says builders are starting to look up the food chain to developers for support.

“We see situations in the marketplace where builders are approaching developers and trying to share the burden of these cost increases, but developers are wary of setting a precedent and then failing to manage the contagion risk in the industry.

“They are doing their best to survive the situation and I think the good and well capitalized builders share the pain with their subcontractors, but it is difficult when multiple subcontractors are having problems and the builder is on a tightrope with the developer and costs in time .

Fitzgerald says there is real economic headwind for the industry, as well as a structural problem with how the industry operates.

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“The structural problems stem from the transfer of risk to those who can least afford it. This ranges from developers transferring risks to main contractors and then main contractors transferring risks to subcontractors.

“It’s shifting risk to those who can least afford it that creates this fragility, which leads to a disproportionate representation of insolvency in the construction industry.”

Sharp viewers of the construction industry point to another structural problem that has meant that subcontractors, including large subcontractors who bring workers on projects, are forced to bear the financial stress of an overstretched contractor.

In 2018, a federal government by former Master Builders Association boss John Murray urged a federal government review of the security of payment laws in the construction industry, and urged state and federal governments to pass new laws. to protect subcontractors from the financial consequences of a major collapse of a construction company. This is driven in part by laws that allow contractors to redistribute money paid to the company for subcontractors’ work throughout its business to fuel other projects or to pay other subcontractors first.

Dave Noonan, the national secretary of the CFMEU’s construction division and director at developer CBUS Property Group, says the union supports the Murray Review’s recommendations.

“We support the recommendations of the Murray review process, the legislation should require cascading of statutory trusts,” said Noonan. These trusts would ensure that money would be set aside to pay subcontractors for the work they do.

“The fundamental question here is whether prime contractors and builders should be able to use other people’s money – in other words, subcontractors’ money – for whatever purpose they want and we think the current practice is not working and legislation is needed to the interests of subcontractors and workers.”

But such a change takes time and with the crisis raging in the sector, market guards believe that any changes – structural, legislative or otherwise – will come too late to save some operators.

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