More big builders to go bust in 2022?

Shhh.. I told you I can't say who's in trouble last year.
The rumour goes like.... "blah blah blah" insert tier 1 builder.

 

Many builders didnt have contracts that catered to price rises for materials. Or didnt use them.
Some businesses incl builders are just badly run and collapse may be unrelated to materials etc. In past examples over years many builders who face difficulty have done so a while. A year or two. They then chase easy work and inevitably collapse later after burning through contractors that are unpaid etc. Taking on unprofitable work for sake of work is often the end. but it follows insolvent trading.

States have laws that help indentify the issue early. Security of payments laws. Makes it easier for contractors to pursue default judgements if they are not promptly paid. And I mean - 14 days. Not three months.
Ironically so many contractors dont use these laws to their advatage. Its easy to comply. But invoices MUST comply. QLD even has a simpler requirement that other states where the invoice doesnt need to contain special wording.

Security of payment | ABCC.

Failing these laws triggers QBCC license issues very early. In one of these examples i know NO contractors used the law to help them get their money so nothing of concern became evident.

 

Two major builders went bust in Perth 2021.

Sign of the times??

 

Businesses go broke all the time. At present the shortage of labour, high rising costs for materials and covid matters arent helpful and expose builders with financial issues to increased risk of failure. My concern is this often takes time. Some may contnue on and struggle and any dip in demand oetc could see them struggle on and later collapse. Each state agency will need to monitor this. One recent QLD collapse indicated they had lodged false data to Fair Trading for some time.

 

I was talking to a builder friend interstate last week. He described the last couple of years as the 'profitless boom'. Busier than he's ever been and employing more people than ever, but all his contracts are fixed price and supply costs have gone nuts - steel and timber in particular.

 

I know a major project builder. Their clients are often less than happy to have clauses exercised to up prices for specific cost impacts. Most unhappy but tolerate that the land value has VASTLY appreciated and many loans are able to be increased to cater for cost rises. The cost rises are often $20K and more.

Guess how much the Commonwealth grant home builder grant was in many cases ? $25K...Co-incidental ?

 

'Humanitarian disaster': Hundreds left in limbo by Australia's biggest construction company
Australia's biggest construction company, CIMIC, accused of not paying foreign workers in the Middle East

Watch this space

I will say no more.

 

You've got builders committing to fixed price tenders and then having delays in land registration, and then delays in materials arriving. This is exposing them to spot shipping price increases, which have been happening increasingly since middle of last year. Timber is probably the biggest issue, although its not the only issue. 12+ week delays after you order it (sometimes more) and you pay for it when it arrives on site, not when you order it. It makes the fixed price contract model extremely exposed to shipping price volatility. When you consider how many builders took on loads of work last year that was priced at X and is now costing Y, and then had to wait to commence because of lock downs, and then have to wait even longer because of supply chain delays, this is why you are seeing so much of this happening. It costs @ 25- 30% more to build today than it did a year ago... thats just materials. A lot of these contracts were signed a year ago.

 

Don't they just phoenix into something else?

 

Some have

 

https://www.news.com.au/finance/bus...s/news-story/548089eb06066385e762bd1ef7c7b54e

Warning as thousands could be impacted by construction company collapses
A building insider has revealed the shocking state of the industry with half of construction companies in trouble and a “terrible” impact in store for customers.

 

https://www.news.com.au/finance/bus...l/news-story/88a64c3583cc55909401c0d2e8c158fe

Metricon: ‘Crisis’ gripping building industry as big names fail

 

Margins they use are just unsustainable. Cost + 5% often. They seek advice and are endlessly told pricing is wrong but they say they would lose business. This same issue impacts civil construction and even Govt projects. Govt hides it to avoid project collapse by paying more !!! I kid you not. Sydney Metro extension faces a $1.5BILLION blowout and the Govt will just pay it. The more volume the greater the risks they cant achieve completion without losses. But they just roll the losses along as work in progress so its hidden. Eventually they have $4m of creditors and $1m of work in progress for client paymnet and they reaslise they cant pay their constractors. Poor old constractors are usually last to wear the problem since essential materials accounts will be paid to keep supply moving. A few major warning signs
- Unexplained increases or early requests for progress payts
- Contractor paymnet blow out. eg 30 days becomes 60, 90+
- Changed materials specs eg PGH brick suddenly become Boral etc
- Supervisors quit (they see the poblem first hand)

 

Yup whole industry is mispriced through everything. Risk not priced appropriately by developers, builders or subcontractors and it the risk just gets passed down the food chain to smaller and smaller companies who are less equipped to price the risk properly.

Then when those risks materialise costs go up and everyone starts pointing fingers or trying to claim it was completely unforeseen

 

Agree. But some price well. I know one major project builder who prefers planned sale OTP as a preference. They opted out of homeworld. Many others are now seeking to do this. They can control costs and sell a completed project with value added. Far more profitable. Many builders are trapped in the Homeworld system which encourages house and land sales and then the builders are exposed to client delays before it can even become a completed quote. Lead time is often a year or two depending on land registration issues. Selling OTP project builds instead is a faster leadtime as the buyer often sees it with two-three months to go and there is little to vary which assists on time completion. Also construction is better managed when 5-10 are built in one run. Often helps deals with land developers too.

 

Yeah definitely sounds like a better model. Much closer to the OTP unit model where there is little opportunity to change things or indecision on the purchaser side to affect progress.

 

I was having a chat to one of our QSs last week. He lives up on the north coast of NSW and does a lot of high end resi stuff.
He was told that the price of LVLs was due to rise 40% in the next few months. The only east coast producer pulled out a while ago leaving a WA maker the only local provider. Shipping problems and increasing costs there make imported stuff more expensive - and slow.
The supply of framing timber has issues, too. A small percentage came from Russia, which isn't happening now. Getting stuff out of other European countries has become tricky - and expensive. The US housing recovery has made the American market more expensive. Local pine plantations will take about 5 years to recover after the fires. Perfect storm.
Our bloke reckons they day will come when it will be cheaper to build full brick houses vs brick veneer - except we probably don't have enough brickies.

 

https://www.news.com.au/finance/sma...d/news-story/f79208e052e1f320a233130b4804eb3a

 

Surprising claim after $14m collapse of Queensland builder Oracle Platinum Homes
The collapse has left 300 homes, 200 suppliers and 70 staff members out of pocket but one construction top shot has a surprising claim.

https://www.news.com.au/finance/bus...s/news-story/36aff5da3e4f2fa12619a09ef6c9ee4d