The industry is in deep trouble, and governments must act now to stop the contagion and create a more sustainable industry.
Building firms are entering administration at more than twice the rate of other industries. Building sector profit margins have fallen from around 3 per cent to below 1 per cent and liquidity has collapsed from 15 per cent to below 5 per cent. Most concerningly, over half of all large builders are now carrying current liabilities in excess of current assets – a technical definition of insolvency.
The building industry is a text book example of market failure. The basic lesson is simple: fixed price contracts work well when the buyer knows exactly what they want, and the seller knows exactly how much it costs to produce. That market is not construction.
In the building industry, all the uncertainty and risks are the responsibility of the contractor and, when those risks are realised, they are funded out of the contractor’s already razor thin profits. This practice is transferring all the risks to the contractors under fixed price contracts has led to a deeply unsustainable industry.
The Australian Constructors Association’s report, All Risk, no reward, proposes government clients lead the way by committing to new rules of engagement. The new guidelines recommend that building contracts become less transactional and involve the builder at the earliest opportunity to ensure an accurate price can be determined. This is to the benefit not only of the contractor but also the client who can be confident the builder will survive the delivery of their project.
A profitable construction industry is in everyone’s interests and should be a key priority for all governments.