Qld building industry crisis: Poorly-run companies ‘like Ponzi schemes’

A leading expert says a number of poorly run construction companies are at risk of collapse because they are run “like Ponzi schemes”, “don’t know their numbers” and operate on “unrealistic margins”. FULL DETAILS

Poorly run construction companies are at risk of collapsing – owing millions of dollars – because they are run “like Ponzi schemes”, “didn’t know their numbers” and operate on “unrealistic margins”.

“It kind of looks like a giant Ponzi scheme, the building industry, where the new contracts coming in fund the old contracts being built,” Association of Professional Builders founder Russ Stephens said.

“If all the time sales are growing, then everything looks rosy on the outside, but just like a Ponzi scheme, once the sales taper off, there’s not enough money in a lot of these companies.

“I’m not talking about the professional builders, because these guys understand their numbers. But for the guys who don’t understand their numbers, there’s not enough money to pay all the creditors and that’s when we see building companies going under for three, four, five million.

“They only turn over six or seven million in a year and you ask, ‘how did they lose all that money in one year?’ and the answer is, ‘they didn’t. They were losing money for the last five years, but no one noticed because their financials weren’t presented correctly and the licensing authority kept presenting them with a new licence.

“And they were racking up more and more debt. It’s like an iceberg, you just don’t see what’s below the surface in a building company.”

Russ Stephens, the founder of the Association of Professional Builders. Picture: Supplied.

One of the country’s largest builders, Probuild, last month called in administrators after its South African parent pulled the pin on further financial support.

The collapse came amid surging materials and labour costs that have eroded the margins of builders, leaving some to finish jobs at a loss.

Mr Stephens, whose Gold Coast company helps builders manage sales and finances, said part of the problem involved licensing authorities failing to enforce “proper controls”.

“It’s why unprofitable building companies are allowed to operate for years racking up bigger and bigger debts,” Mr Stephens said.

“When they finally go under, it’s devastating for a lot of people. Suppliers lose a lot of money but sub-contractors, they lose so much in terms of the actual resources they’ve got.

“It’s always the sub-contractors who get hit the hardest and, really, I think we can all look at the licensing authorities for not putting enough stringent controls within financial reporting.”

Building company Probuild plunged into administration last month. Picture: Ian Currie.

The Queensland Building and Construction Commission (QBCC) requires companies meet its “minimum financial requirements” before receiving a licence.

Details required include profit-and-loss statements, balance sheets and debtors and creditors reports.

However Mr Stephens said the checks were not sufficient to prevent poorly run companies from operating, and undercutting more professional firms.

“The professional building companies that know their numbers operate on realistic margins that allow them to create a sustainable business.

“They’re competing unfairly against the builders that don’t understand their margins and are undercutting them.

“They’re effectively losing money but they’re being allowed to trade by the QBCC because no one is checking their numbers correctly.

“This is because their financials are being prepared by non-construction accountants.”

‘COMPLETELY BLASTED’: BRUTAL LIFE OF PROJECT BOSSES

***WARNING, THE STORY BELOW DEALS WITH MENTAL HEALTH AND SUICIDE***

IF YOU’RE EXPERIENCING ANY MENTAL HEALTH ISSUES, CONTACT LIFELINE IMMEDIATELY ON 13 11 14.

THE building industry is “demolishing” construction professionals with massive workloads, unrealistic schedule times and pressure on costs, a leading researcher says.

The stress on project managers was so extreme that it led to “disturbing” impacts on health and family life, with many reporting they had thought about suicide.

Professor Alan Patching from Bond University, who conducted a study into health and wellbeing involving almost 500 construction professionals, said radical reform of the way contracts were awarded was needed to ease the pressure.

“The current most commonly used contracting system effectively often requires tenderers to bid with low or no margin prices or offer reduced construction time in order to win work,” Prof Patching said.

“... When they win (a contract) they go to their senior project managers and say to them, ‘you’ve got to turn that half per cent profit into a six or eight per cent profit over the course of the job’.

“The only way they can do that is either claim like hell, in which case they don’t get any more work, or call tenders and go to the cheapest tenderer without looking at the fact that the cheapest tenderer is probably the cheapest because he probably left a whole load of stuff out, or he is not very competent.

“This is repeated, this happened consistently with the people I spoke to. They then have to go in and manage the sub-contractor’s resources so that sub-contractor doesn’t go broke, so they can realise the profit.

“So these guys, instead of working normal hours, they just don’t see their families and there’s a lot of stress.”

Prof Patching said project managers, many of whom were on salaries well in excess of $150,000, frequently became overwhelmed by stress and wanted to walk away, but found it difficult to do so.

“They go to their bosses and say, ‘I can’t keep this up, I’ve got to move on and go for another job’. So the boss will throw twenty or thirty grand at them,” he said.

“That represents a private school education, or a new car or a holiday for the family and they take it and move on but the situation hasn’t changed.

“These guys just work around the clock and they’re completely blasted.

“Our industry is really mature in terms of what we build. The quality of the buildings we build is the envy of the world. But in the process of building the buildings, we’re demolishing some of the people who have to manage the building process.”

biz web graf 4 construction

Prof Patching’s comments come in the wake of Bulletin reports highlighting rates of suicide in the construction industry. Workers up to the age of 44 in Queensland are two times more likely to take their own lives than the working-aged male population.

Prof Patching, who worked on the Sydney Olympic Stadium and Suncorp Stadium before joining Bond University, suggested the state government might lead an investigation into new approaches to awarding contracts ahead of the Brisbane Olympics in 2032.

“It’s time for us to come together and say what are we doing wrong that we could do better. The system just isn’t working,” he said.

Professor Alan Patching at the Homebush Olympic Stadium site in July 1998.

“The whole system by which we do things requires some kind of brains trust. We need to deal with it.

“The Olympics produces the ideal opportunity for that to happen.

“What better time to really think about contracting approaches that safeguard taxpayers’ interests, provide a reasonable return to contractors for work well performed, and ensure that no one ever has to knock on a construction project manager’s door and tell his or her family that their bread winner will not be coming home again.”

Follow @keithjwoods

Originally published as Qld building industry crisis: Poorly-run companies ‘like Ponzi schemes’