Insolvency crisis hammering battered builders

Insolvencies in construction have exploded by more than 75 per cent in the past year alone, and many builders are ­warning they cannot cope with the work they took on.

Insolvencies in the nation’s construction sector have exploded by more than 75 per cent in the past year alone, and many builders are ­warning they cannot cope with the work they took on during the Covid-19 pandemic.

The industry recorded 2117 external administrations for the financial year to June 18, 2023 – a 75.4 per cent jump on 1207 for the same time the previous year, according to the latest ASIC insolvency statistics.

Builders are making up a disproportionate share of the companies that run into trouble as their margins shrink and the collapse of larger operators cascades through the industry.

Hutchinson Builders chair Scott Hutchinson. Picture: Lyndon Mechielsen/The Australian

Big operators told The Australian the state of the industry was partly due to the amount of construction that was taken on when the sector was stoked with stimulus during the pandemic.

“It’s generally overheated everywhere. Productivity is way, way down and prices are going up,” Hutchinson Builders chair Scott Hutchinson said. “The only light at the end of the tunnel is waiting for construction costs to make jobs not stack up, and that’s happening every day.”

Mr Hutchinson said there was a “ridiculous” labour shortage, and this caused more problems.

“There will be more insolvencies on the way up, but there are the ones trying to win work for cashflow on the way down so there will be another lot coming at that end,” he said.

Administrators confirmed the tough trading conditions. Revive Financial’s head of business re­structuring and insolvency Jarvis Archer said clients were seeing insolvencies in construction outstrip the rest of the nation’s businesses by more than 10 per cent.

“Various construction businesses we’ve spoken to in the residential building sector reported a drop in new projects in early 2023 when interest rates were rising, house prices were falling and the economic outlook was generally bleak. Combined with some major builder collapses, people were scared off building,” Mr Archer said.

“While total insolvencies have increased by 54 per cent compared to last financial year, construction insolvencies have in­creased by 65 per cent,” he added.

The number of construction external administrations for the 2023 financial year to June 18 represented 28 per cent of the total number of 7578 external administrations across all sectors.

The level of construction companies in administration was double the next biggest category of accommodation and food services, which notched up 1058 external administrations in the year to June 18, 2023.

The initial wave of corporate collapses that hit home builders spread into high-rise construction and some areas of civil building, impacting education and hospital works.

The mix of high interest rates, still rising input costs and the tough environment for both securing labour and finance is now forcing developers to shelve projects, and putting others at risk.

However, the industry could enjoy a pick-up due to new work that is coming through, partly as housing shows signs of recovering. “There has been a recent turnaround, with some project home builders seeing a rise in new contracts. Additionally, developments that were shelved in late 2022 are coming back online,” Mr Archer said.

“The newly signed contracts are expected to see improved conditions for the local construction market as building commences, in the context of more stable prices and increased ­labour availability.”

Other players have warned there could be a slow burn as more companies that were in trouble finally collapse.

Association of Professional Builders co-founder Russ Stephens said there was a big lag factor between builders losing money and going under.

“This slowdown is going to catch them out, and that’s the reason why we will see a lot more liquidations over the next six months – it’s going to get worse before it gets better,” he said.

“The sales process can take up to six to 12 months for builders. We are seeing consumers in that process have second thoughts and sit back and wait and see what happens with builders, interest rates and inflation. We are also seeing the amount of new inquiries start to slow down as well. It’s nothing too dramatic when compared to pre-Covid but in the context of how busy it was during the Covid boom it’s a considerable slowdown on demand,” Mr Stephens said.

He warned that builders that did not carry significant reserves would get found out.

“The negative effect of these building companies going down is that the subcontractors get burnt, maybe more than most.

Revive Financial Partner Jarvis Archer.

“These guys live hand-to-mouth and they’re the ones who tend to get hit hardest. When a subcontractor goes down, all the orders that other builders may have placed with the subcontractor then have to be sourced at higher prices – so it does have a knock on effect.”

Forecasters have painted a dire picture of the outlook for the construction sector.

Oxford Economics Australia warns that total building work is forecast to slide a cumulative 21 per cent over the three years to financial year 2025, with activity bottoming at $104.5bn.

The economics house expects the cash rate to hit 4.6 per cent by September and hold at this level until mid-2024, while delays, elevated construction costs and industry uncertainty continue to suppress buyer confidence.

“New-home sales, dwelling approvals, and home construction loans have deteriorated, ­setting the scene for a deep residential downturn,” Oxford Economics head of construction and property forecasting Timothy Hibbert said.

KordaMentha partner Craig Shepard said more borrowers in the construction sector were seeking advice about their options, and there was a change from the Covid era when safe harbour rules protecting struggling companies were in place.

“That’s not there anymore,” he said. “The days of no enforcement and collection are not there anymore. They need to work their way through issues.”

Mr Shepard said problems had arisen due to the escalation of costs on long-dated projects, with a series of administrations showing how builders had come unstuck due to legacy contracts. “Companies carried too much risk for the rewards – but the worst may have passed,” he said.

Originally published as Insolvency crisis hammering battered builders