Experts send dire warning following the collapse of a string residential building firms, including Probuild

Experts have sent a dire warning following the collapse of three building firms, and comes as Probuild went into administration leaving a trail of $5bn worth of unfinished projects. WHAT IT MEANS FOR HOMEBUYERS.

EXPERTS have warned the collapse of three residential building firms in recent months is “the tip of the iceberg’’ for the construction industry, as it struggles to build homes under fixed prices which are no longer profitable.

The warning comes as building giant Probuild this week called in the administrators, with $5 billion worth of unfinished projects around the country.

Sky-rocketing costs for materials such as steel, a crippling lack of timber and plasterboard and unprecedented demand for new homes and renovations have parts of the residential building industry on its knees.

News Corp has been told one major residential builder is offering customers $10,000 cash to walk away from their fixed-price new-home contracts.

Tradies pack up their equipment at Brisbane site. Picture: Dan Peled

Other builders are telling buyers the start date for construction is in four years’ time, hoping the buyer will cancel the contract and look elsewhere.

Two building firms in Queensland and a franchise in Tasmania went bust late last year and the industry is bracing for more, with buyers left without homes, employees out of work, subcontractors unpaid, and creditors left millions of dollars out of pocket.

Russ Stephens, the founder of the Association of Professional Builders, said the problem was a national one which had seen costs rise 35 per cent for big builders, and between 15-50 per cent for smaller builders.

“It started maybe about 15 months ago when things started really taking off for builders, and they continued to sign more and more contracts in advance, building out their pipeline,’’ he said.

“There’s nothing wrong with that, it’s how efficient building companies operate.

A worker leaves a meeting in the Probuild office site in Melbourne. Picture: Ian Currie.

“But the problem is because they’re signing fixed price contracts they committed to a selling price, yet their costs have inflated way beyond all expectations.

“That’s actually squeezed their margins. They’ve ended up losing money on jobs, even the jobs that started quite quickly. The costs went up so quickly … they knew before they even started them that they were unprofitable.’’

In some states which allow cost escalation clauses or cost overrun allowances, builders were able to renegotiate the cost of the contracts with the purchasers.

But in other instances, the price was locked in, and builders knew before they turned a single sod they were going to lose money on the job.

“Because we’ve got different licensing authorities in each state then the rules are slightly different on contracts in each state and it’s particularly tough for Queensland builders because costs-plus contracts are illegal for residential home builders, so they can only do fixed price contracts,’’ Mr Stephens said.

Tradie at the Probuild Brisbane site. Picture: Dan Peled

“We were warning builders to be very cautious about the contracts they were signing and how far in advance they were signing them because it could come back and bite them.’’

Mr Stephens said timber costs had doubled last year due to lack of availability, and steel had gone up 45 per cent.

“Plasterboard has increased quite considerably and it got to a point in South Australia before Christmas where there was no plasterboard, literally none in the state,’’ he said.

“Apart from that, we’ve seen less severe increase in things like concrete, paint.’’

In Queensland, two firms, Privium and BA Murphy, called in the liquidators last year, with Privium having lost $28 million in 2020, and BA Murphy owing $11 million to 550 creditors. A Hotondo Homes franchise also went under in Tasmania.

Workers leave the Probuild worksite. Picture: Zak Simmonds

Mr Stephens said the collapse of the three firms was the “tip of the iceberg’’ and Government stimulus money had led to unprecedented demand in the run-up to Christmas in 2020, resulting in an “unbelievable surge’’ last year which now couldn’t be met.

“This problem is going to be huge in 2022 because a lot of builders have been losing a lot of money on every job they’ve been doing in 2021, from their supply materials going up in price, from delays from lockdown, from not being able to get suppliers on site, not being able to get subcontractors on site.’’

“In terms of building company failings it’s going to get a lot bigger in 2022 as the sales slow down, which we expect to see when interest rates start going up.’’

“At that point we’d expect demand to drop off. And that’s when we’d expect to see a lot more builders closing their doors.’’