Half of Australian building companies trading insolvent

Recently we have seen multiple major residential construction companies go into liquidation, including Probuild, Condev, ABG Group, and Privium, alongside several smaller players like Hotondo Homes Hobart, Home Innovation Builders and Next.

Construction giant Metricon is also reportedly on the verge of collapse following last week’s sudden death of founder and CEO Mario Biasin.

Russ Stephens, co-founder of the Association of Professional Builders, believes the recent collapses are merely the “tip of the iceberg” and estimates that half of Australian building companies are currently trading insolvent, meaning they cannot pay their bills. And their ultimate demise could end up harming thousands of customers:

“It’s easy for a large company to delay a decision to go into liquidation by six months or even a year … However, as we get towards the end of the year it’s probably safer to predict it could be thousands of consumers affected by collapsing building companies.”

Stephens says lots of builders have lost “a lot of money” over the past year on the back of an “exponential rise” in costs. This view is backed by the Master Builders Association, which claims 98% of its members are seeing their profits squeezed or are losing money.

Perversely, the collapse in profits and collapses have arisen despite the Housing Industry Association (HIA) forecasting that construction levels will remain red hot for the foreseeable future:

“There were 75.7 per cent more detached homes under construction at the end of 2021 than pre-COVID. There are also more homes approved and waiting commencement than in any previous cycle,” [stated HIA Chief Economist].

“With this elevated volume of homes in the pipeline, the number of homes under construction will remain at this high level until at least June 2023″.

HIA housing construction pipeline

Hence, home builders are experiencing a “profitless boom”, losing money despite being busier than ever.

Imagine working your ring off only to end up worse off? That’s the reality facing the building industry.

Unconventional Economist

Comments

  1. Technically speaking, trading insolvent doesn’t mean that a company can’t pay its bills. It only means that if the bills became callable now, the company would need a capital injection to remain viable. As many builders are small enterprises, its not too surprising that they’re trading insolvent as they likely manage their cashflows very tightly, and if the company is forced into liquidation, the builder will have to liquidate personal assets to meet company payments.

    I run my company slightly insolvent, but make sure I’m covered by un-drawn loan facilities. I have better uses for my capital than tying it up in a zero interest call account.

    • boyracerMEMBER

      That is not insolvency. Being solvent is the ability to pay debts when they fall due. It is not having sufficient cash in the bank to pay all your debts today. If you have an undrawn line of of credit to pay your debts as they fall due then you are not insolvent, obviously so long as you then have the ability to meet interest and or principal repayments on said debt facilities.

      The building companies described as insolvent are likely delaying payments past the due date and shuffling money around to stave off administration. It can be difficult to prove when companies are right on the edge.

    • Display NameMEMBER

      Its a thin line. As a director of a company if you trade (purchase goods) in the knowledge that you cannot pay your bills as and when they fall due, you can be found personally liable, apart from the misery of bankruptcy. If you think you are on the edge you need to consider entering administration. That gets you some legal protection.

      • Thanks. Yes the comments from you and Boyracer were both excellent. I’m an economist, not an accountant, so this isn’t exactly my area of expertise. For my business ifs not a problem as its a consulting firm and I’m paid in advance, so need to manage a float. My biggest risk is my health, which I’m insured against.

  2. Camden HavenMEMBER

    Builders run a Ponzi finance model where they use customers payment to speculate and it’s when those speculative positions unwound the collapses began, not due to costs if that’s true then houses fully paid for would have been finished.

    • working class hamMEMBER

      Can confirm that, land and house+land packages, are literally called speccies.
      Builders use their sub-contractors trade supply accounts to build homes, many having to run lines of credit because 30,60 or even 90 terms are common.
      Most builders are little more than overpaid ticket clippers, used car sales types, that would trade their own mother for a quick buck.
      Not really surprised that the industry is crying poor, quick, bail out their profit margins or the customers will suffer. All of their assets are in family trusts/relatives names. The only people that will be affected is the sub-contractors, left holding the bag, whilst the builder pulls of the 3rd phoenix in 5 years.

      • Builders….. always smartest blokes in the room, always broke, but always seem to to have a nice house and all the toys.
        Speccies galore for sale on the sunny coast, and usually sold before completed, some of these guys have been skinning the cat last few years.
        E.g.nearby 320k block with a slightly upmarket single story project home maybe 350k went for $1.03m a few months back. Pretty healthy return, and plenty more like it.
        Don’t you hate a free market when it kicks you in the nuts.
        No sympathy I’m afraid.

        • kiwikarynMEMBER

          In NZ I am now seeing newly built homes sitting unsold, and developers trying to offload half built homes. There are ads for “buy now and get a big price reduction” and “we will pay your mortgage for a year” deals.

      • Ronin8317MEMBER

        They are however a necessary component of the leveraged housing paradigm : no builder, no 95% construction loan.

  3. The guy buying my cost plus house, seems to be doing ok, even taking his time

    • Yep the better quality builders are all working on cost plus now. Even my plumber neighbour is only doing business that way – it’s just too risky otherwise and there is so much work on that if they are reputable & have a good name they’re doing well. Things are taking time because materials are hard to come by and they just have so much work on.

  4. bubbah buddhaMEMBER

    Canary in the coalmine…developers are the first domino in a long line that ends in banks. Watch Revenue scramble as all the SMBs hit the wall, and suppliers and vendors fold.
    Welcome another new term to Australian parlance ‘ghost estates’.
    Straight out of the 2008 European playbook….but but but it would never happen here!

  5. Isn’t it amazing what a little inflation can do to change things. So far all we’ve had is a light sprinkling of the secret sauce (Inflation) and what do you know, highly leveraged players are dropping like flies. Imagine we get the real deal, proper 70’s style Inflation complete with wage -price spiraling. Just imagine it!
    Imagine labour has pricing power.
    Imagine wholesale suppliers have absolutely no fear and raise prices at the drop of a hat
    Imaging you’re own wage expectations have far greater than just CPI adjustments in mind
    Imagine Local manufacturers discover that they can make a given item for half the cost of the imported item
    All made possible because we allowed ourselves to do this, we simply demanded that our labour to be properly priced.
    Inflation isn’t she wonderful! this is the beast that we’ve all been scared of, we were all told horror stories about wage Inflation and we believed them, yet here it is and it’s not so horrible.

      • Agreed (somewhat) but my point is that without uncertainty in prices for materials and/or labour it is Capital and capital availability which represents the greatest project risk.
        If Capital costs are decreasing and capital is easily available, then project risk come down to simply project execution time.
        Under this case the building system evolves to under estimate the true risk or Labour and Material price changes.
        So today we have Building material inflation in spades and this goods inflation is also translating into wage (subcontract price inflation) because of the inherent uncertainty wrt material availability. Once subcontractors have this Inflation mindset it’s off-to-the-races with “wages”, wages will gallop away before we know what has happened.
        And this is good news because it reduces the value of Capital in the equation and thereby reduces speculation.

  6. How much of this is due to end-of-financial-year phoenixing? The same players will likely re-incorporate under new names. But, I guess if you are left with a half-built house, it’s not going to be a very good Christmas. In NSW, there used to be a fund that stepped in when builders went insolvent, but Bob Carr raided it, closed it down and used the money to pay for the 2000 Olympics.

    • Qbcc in qld has an insurance scheme, not sure how good. Nsw has one pays out 20% I think I read.
      Lots pain on the way

    • Ronin8317MEMBER

      The Home Builder Warranty scheme still exists in NSW for anything under 3 storey. Also, your comment about Bob Carr raiding it to pay for 2000 Olympics is a myth : it only had like 70 million dollars in reserve, which is peanuts compared to the 2 billion dollar + cost of the Olympic. The potential liability is massive, so the government gave it away for free. Then HIH collapsed, and the government have to provide the insurance again, but they limited the liability by excluding high rise from the scheme.

  7. GeordieMEMBER

    Imagine working your ring off only to end up worse off?

    Welcome to Straya! Livin’ the dream.

    • hareebaMEMBER

      Waiting for a journalist to ask a politician why a salary is insufficient to get ahead in Australia. Buckleys.

  8. I remember Consolidated Constructions, here in WA who went bust in 2004. They were losing money on big Projects for years, always undercutting and using the next project to pay off the last job, so they must have had a line of credit somehow, but eventually after starting work on the RAC building in Wellington street, the piling got done, then they went bust. I worked for another Engineering construction company at the time, and they (CC) always undercut us on tenders by 20%. The whole industry is run by desperados always trying to make a quick buck, and ripping off subbies, which is possibly why many Apartments have so many problems, there is no budget to do the job by the specification, the supervisors look the other way, I guess the client is more interested in flogging it off to the off-the-plan brigade, but luckily if they are doing works for Main Roads, at least they get held to account for dodgy work and have to rectify it, so getting it right is cheaper than cutting corners.

  9. It’s the multi-tier nature of building that makes it risky for the guy actually doing the work. The Prime Contractor may subbie out most of the works to another contractor, who then breaks it up further to smaller contractors. The Prime Contractor gets paid by the client, and the money is expect to flow down the line. However when it fails to, often the 2nd and 3rd Subcons go into administration as they are unable to pay their bills. I recall margins on some of our jobs, were 2-3%, so inflation on Materials, Labour & Plant could easily put that into negative figures.

    • ritchieMEMBER

      Spot on. Risk is transferred, through contract, to those least likely to be able to mitigate it — usually smaller scale subbies.

      Winning tenders on 2-3% margin and hoping to make more on site through variations and the like is a strategy akin to hoping the roulette wheel never lands on zero whilst you go “all in” on a bet. It looks genius until it fails, then it looks stupid.

      Everyone in the industry knows this but the strategies and incentives are well worn paths. Moving the industry to cost plus would be a good start, but that comes with its own headaches, like ensuring the contractor isn’t running two sets of books.

  10. Hugh PavletichMEMBER

    Metricon customers whose dream homes became nightmares … Tawa Razaghi … Domain / Sydney Morning Herald

    https://www.smh.com.au/property/news/sleepless-nights-the-metricon-customers-whose-dream-homes-became-nightmares-20220523-p5ann1.html

    Australia’s construction industry facing huge challenges as companies go under … News com au

    https://www.news.com.au/finance/business/australias-construction-industry-facing-huge-challenges-as-companies-go-under/news-story/fff7c3f77ae7abfd48b266b963492587

    • kiwikarynMEMBER

      Metricon is now in the death spiral regardless of their financial situation, as no new buyers are going to sign up to buy a house from them, as the risk of losing their deposit money is now a known and obvious risk. So no new dollars coming in the door for them to pay off the old debts. Tick tock ….

  11. OfficeboyMEMBER

    If you asked your average builder what their working capital position was and the relevant level of the components and then their projections their answer would be ‘ what ? ‘

    • That’s because they are too cheap to hire Project Planners and Cost Engineers, to keep track of Progress, Trends and Cash Flow. Without the basic information, you are flying a 747 with your eyes closed.

    • As per above, smartest blokes in the room ……. when things are going well