‘It will be biblical’: The construction industry is bracing for failed businesses and half-finished homes after the boom

Jack Derwin Aug. 5, 2021, 2:25 PM From Businessinsider.com.au

• The boom in the construction industry will be followed by a bust, the industry warns.
• As the price of materials soar, delays blow out, and shortages sting, most in the sector aren’t making profits despite the oversupply of work.
• The Association of Professional Builders believes as many as 60% of operators are losing money currently, with many due to fail early next year.

From the outside, the construction industry would appear to be making hay while the sun shines.

The hugely popular HomeBuilder program, handing out $25,000 grants to eligible Australians, has helped fuel record demand for building and renovation projects.

The pipeline of work is so significant that many builders have the next 12 months booked out entirely, with prospective clients having to work just to find somebody ready to break ground.

But despite the apparent gravy train, the industry says it is heading off a cliff.

“It is a perfect storm,” Russ Stephens, cofounder of the Association of Professional Builders, told Business Insider Australia. “Excess demand is creating shortages that are destroying any net profit builders were expecting to make.”

Material shortages and skyrocketing prices mean builders are now paying top dollar for timber and other resources, as construction inflation flirts with 25%. Government grants have ironically only “poured fuel on the fire”, as a global timber shortages bites.

“[Grants] have just made everything worse. It’s just done so much damage and I’m not sure if it can be undone,” Stephens said.

At the same time builders are forced to navigate state-wide lockdowns and other pandemic disruptions. Two in five workers are still prohibited from work under tough restrictions implemented in Sydney’s south-west, while $6 billion worth of projects in affected LGAs remain frozen indefinitely.

Across the country, delays and soaring costs have put the whole sector under incredible strain, and frustrated customers waiting anxiously to move in to their new home.

“Builders are literally busier than they’ve ever been, in a lot of cases running four or five times the workload they would have previously…they’ve never seen anything like it,” Stephens said. “But it is just leading to this nightmare scenario where they are constantly needing to reschedule.”

Stephens estimates as many as three out of every five construction companies is currently making a loss, whether they know it or not.

“Most don’t even realise it, because they sign fixed price contracts ahead of time that don’t account for unforeseen costs. The longer these jobs go on, the bigger the blowout becomes,” he explained.

“A job might be meant to run for seven months but will run for nine. That is weeks of extra scaffolding, fencing and toilets. It is weeks of vehicles, offices, and supervisors while you’re not able to take on new jobs. That is what catches a lot of guys out.”

Accumulating silently over time and operating with a positive cash flow, it can take companies months or even years before some realise the dire straits they are in.

While many may not even realise it yet, Stephens expects the reckoning in the industry early next year to be “biblical”.

“We know there’s a softening in the market coming up and when new contracts start to dry up, we’ll start to see businesses falling over. It’s my personal opinion that we’ll see some big companies go as well. It’ll be carnage,” he said.

“It all leaves the industry potentially in a terrible state. You’ll have half-finished homes out there which good operators won’t want to touch because firstly, it’s a liability and secondly, they’ll still have work coming in.”

It’s why the APB have launched their own online education program to address a technical skills gap and teach builders the crucial financial skills they need.

Yet despite the alarm bells ringing out, it’s unclear where the solution lies. Some will already be well beyond the point of no return, according to Stephens.

Those who are still viable will simply need to be vigilant from here on out.