Probuild’s collapse will unleash more pain and end ‘gravy train’: Robert Gottliebsen

Probuild’s collapse will unleash more pain and end the building industries ‘gravy train’. Picture: Dan Peled/NCA NewsWire

The collapse of Probuild will cause massive losses in the subcontracting and consulting industries and could send many enterprises to the wall. But that’s not the biggest repercussion from the collapse.

Longer term the gravy train which enabled developers led by the industry superannuation funds and Cbus to make a fortune developing properties is coming to an end.

It is paradoxical that the workers whose union driven work practices contributed to the fall of Probuild should also be among the sufferers.

If we go back 30 or 40 years it was the developers of a property who took the risks. The builders undertook the construction on a cost plus basis. But in the 1980s and 1990s that changed – partly through innovative contracts that Bruno Grollo offered – and builders began tendering on a fixed price basis and taking the risks.

Developers with the certainty of a fixed price building contract could sign up buyers and renters with their “no risk” profits in the bag. It was the builder who was taking the risk.

But now that Probuild has fallen over in each of the incomplete buildings the developer must find a new builder to complete the task.

Suddenly the risk shifts to the developer led by the industry superannuation funds. And the biggest risk of all looks like Cbus Property’s 443 Queen St high-quality apartments project in Brisbane. The project may be haemorrhaging as much as $120m. And so Cbus, rather than Probuild’s South African owners, must now meet whatever the final cost blow out turns out to be.

But it’s not just Probuild that is causing this major crisis in the industry. Builders who tendered on a fixed price contract are suffering enormous losses because of the rising material costs, the difficulties of getting supplies particularly from China, the delays caused by Covid, union actions and many other factors.

The losses are colossal and almost all our major builders who are suffering these losses are owned overseas. The South Africans who owned Probuild shook their heads and said: “Why should we wreck our company by transferring sums to Australia to subsidise industry fund and other developers?”

And the industry suspects, but can’t prove, that the Chinese were enraged when their bid to take over Probuild was rejected on national security grounds so deliberately made it hard for Probuild subcontractors to gain supplies so increasing the costly delays.

Yesterday, I was yarning to a number of non industry fund smaller developers who told me that building contracts they put out for tender two years ago but delayed accepting because of Covid uncertainties are now being re tendered. The new tenders are coming in with around 40 to 50 per cent higher price tags.

Tender increases of that sort go way beyond current material and other costs increases. What the builders are doing is pricing future risk and the price is high because there are just too many uncertainties. And I suspect they are looking to recoup some of their past staggering losses.

Of course on the basis of the new tender price, the developments no longer make sense because they require much higher rental or sale prices.

Australia’s problem is that the major developers led by the industry funds are simply not structured to take the risks that are required if developers return to being the risk taker.

Sub-contractors and tradesmen pack up their equipment and walk off the 443 Queens Street construction site in Brisbane’s CBD after building giant Probuild’s financial collapse. Picture: NCA NewsWire / Dan Peled

Development will simply stop. How do we get out of this problem? Here are a few suggestions:

*Given that most of our builders are overseas owned we need to encourage second tier builders to move up the ranks. The developers of all the Probuild projects now have the risk so they should award the contracts to complete the buildings to second tier builders who will construct on a cost plus basis. That way they can develop the expertise to move to the next tier

*The CFMEU needs to realise that their members will suffer as a result of the Probuild collapse and I should give any builder completing those tasks an “easy run” and not play quick shutdown games.

*Treasurer Josh Frydenberg and Assistant Treasurer Michael Sukkar need to tell the Australian Taxation Office in no uncertain terms that this is not a time to conduct a “search and destroy” exercise on building contractors and consultants. There are clear signs but this is exactly what the ATO is planning via quick payments so they can take advantage of the current situation where there are no proper tax collection rules.

*State and local governments double the costs of most buildings via their planning chaos and taxes. Development risks can be slashed by clear and co-ordinated policies from state and local governments.

*Longer term if the industry funds believe they not in a position to be a developer taking the risk then they need to foster development companies where they can be a shareholder with a limited liability

And finally we need to brace for the repercussions in the subcontracting and consulting industries for what is a very big collapse.