investigation
Construction chaos: Building industry cries for reform as WA industry sends high-profile firms under

The graveyard of building firms, including some of the biggest names in construction, keeps getting bigger. And it’s no exaggeration when insiders forewarn we might not have much of an industry left, unless some pretty drastic things occur to divert it from the road to oblivion. The problem isn’t a shortage of work or customers. Far from it. It’s just become a lose-lose industry for most participants because of entrenched behaviours, outdated practices, bad decisions and a fair sprinkling of greed. Since COVID-19 hit, there have been external and unforeseeable forces slamming the industry. While catastrophic on their own, they’ve had deeper impacts because of structural weaknesses around procurement and contracts. The old models have been critically exposed as no longer fit-for-purpose. The rate of businesses falling over has meant a bumper harvest for insolvency practitioners, who along with the banks always get paid from the corporate carcasses. Everyone else, from subcontractors who make up 98 per cent of the industry, materials suppliers, and niche businesses servicing the sector, to the hundreds of heartbroken residential customers left with half-built homes, is left licking their wounds. According to the corporate regulator ASIC, 94 construction businesses in WA went belly-up in 2021-22. Commercial builders like Probuild, Pindan, Jaxon Construction and Firm Construction were among the losses. Home builders also went to the wall, including New Sensation Homes and Home Innovation Builders on the same day. The biggest shock was the collapse of the 104-year-old Clough Group in December. For every drowned builder, there were scores more floundering. Despite seeing revenues increase 20 per cent to $1 billion last year, Perth’s BGC Group recorded a loss of $41.6 million. The company was put up for sale last April only to be taken off the market in September due to “market conditions”. It’s no surprise people have been leaving the industry in droves, many heading to more secure positions in mining, at a time when building companies are scavenging for workers. There’s even a desperate shortage of unskilled labour. According to Infrastructure Australia, WA has the worst labour shortages, with 2.7 workers in demand for every person supplied. Of course, such shortages are not unique to the sector. In this case, it is the most acute pressure point, strangling an industry of huge strategic importance. Worth $29.3b billion in WA, it employs 9.4 per cent of workers here. Nationally, it employs approximately 1.14 million Australians. The industry touches everyone. It provides homes, recreational facilities, schools, hospitals, entertainment venues, airports and shopping centres. The skyline of Perth has changed remarkably over the past 20 years because there was a quid in it for all who put on a hard hat. Likewise, we have scores of new and vibrant suburbs courtesy of home builders, who fondly recall a time when they could build a house in under nine months and make a profit. Without getting all dewy-eyed about the past, the rough-and-tumble industry has always been fraught with risks. It is no place for the faint-hearted. Against the backdrop of booms and troughs, businesses have come and gone. Yet there has been nothing quite like this current “profitless boom”, according to stakeholders who’ve spoken to The Sunday Times, both on and off the record. Despite a history of bosses and unions squaring off, there’s almost universal agreement on some of the urgent changes needed to save the industry. The hard part is coming — converting plans and words into action. Generational reform WA’s Master Builders Association has pitched to the McGowan Government what it sees as “once-in-a-generation” reforms. The State Government is both the biggest property developer and building client in the State. “We need the Government to lead because we can’t do it on our own. I’m begging them to lead and embrace this because we’re only going to get one crack at it,” Master Builders WA BA executive director John Gelavis said. One of the proposed reforms is the dumping of fixed-price contracts, long favoured by the Government and private developers. Fixed-price contracts minimise the developer’s risk exposure and provide extra comfort to the banks providing the finance. The risks have been borne by the head contractors and the subcontractors beneath them. In the past, they’ve been able to absorb price shocks even if they’ve been a kick in the guts, eroding or wiping out profits. Cost increases were more predictable under typical market conditions. The pandemic put a flamethrower to typical market conditions. Everything suddenly shot up in price due to supply chain disruptions. In the COVID-free, Truman Show-style bubble that was WA in 2020 and 2021, the construction industry, like the mining industry, forged on as best it could. The price of pine more than doubled. Reinforcing steel skyrocketed in cost. It was the same story for plasterboard, fibre cement, glass, plywood and other essential materials. “No one anticipated the global supply chain issues,” Mr Gelavis said. “No one anticipated the dramatic cost escalations. Who would have predicted we would have borders closed to the rest of the country? “Who would have anticipated we would be getting mandatory vaccinations? Even in my role, I didn’t think that I’d be talking to my members about whether they should get vaccinated or not.” “Unprecedented times” now feels like a jaded descriptor for the past three years. For the construction industry, it has been bedlam interspersed with waves of pain. An insufficient skilled labour force couldn’t be topped up by workers from the east or overseas because of the hard border. And numbers were thinned further by some tradies downing tools and taking a break from the industry because they didn’t want to get vaccinated. With fierce competition for those available, labour costs went through the roof and for some trades, they remain high. With such volatility, it was no wonder several builders stopped tendering for government work where fixed-price contracts were in place. It was simply not worth the risk, Mr Gelavis said. “If they implement these reforms, more builders will want to work for them. And then naturally the private developers are going to have to decide if they’re on board, he said. “Builders are very careful now about what they tender on. If these contracts aren’t Australian Standard contracts, then builders will be very hesitant to engage in them.” He said the spate of insolvencies had illuminated the dysfunction in procurement methods, contract formats, payment terms and timing. The industry can no longer be weighted on the “lowest price wins” scenario. “This approach has resulted in a race to the bottom which has directly contributed to insolvencies within the industry,” Mr Gelavis said. “Many successful alternative procurement models are operating in other international markets which focus on value outcomes. These models encourage a partnership-type approach and allow for the risk pricing to be a whole-of-project issue, and better managed, based on fact rather than guesswork.” Mr Gelavis said builders had been “almost conditioned” by developers, including the Government, to chase razor-thin profit margins, by saying: “You won’t win a project unless you’re really competitive.” Both the MBA and the construction union, the CFMEU, have called for fairer and more flexible terms in contracts. “It’s no longer realistic for builders to sign up to fixed-price lump-sum contracts and be expected to absorb escalation risk,” Mr Gelavis said. “It is clear that the custom and practice of the last decade are not sustainable in the commercial contracting environment. The arrangement between the principal and builder needs to change.” Mr Gelavis said contracts in the past had been drafted to reduce the risk for the developer. “What they do is use an in-house solicitor to draft changes, which place more responsibility (and risk) on to the head contractor,” he said. Under current arrangements, many builders face losses before the first brick is laid because prices have shot up since tenders were submitted and contracts signed. The MBA has called for a payment time frame of seven days and cost escalation clauses. “We’re saying these reforms need to happen now so we don’t see any more insolvencies. If we can get these measures through, it’s going to benefit everyone,” Mr Gelavis said. Undercapitalisation Union boss Mick Buchan agreed there had been “a race to the bottom”, but said “the reform package was an attempt (by builders) to get out of the mess they have made for themselves”. “For almost half a decade, the CFMEU WA has made the case that the construction industry in WA is in crisis,” he said. “Price gouging, under-delivery, competition on cost alone and underbidding, the growth of pyramid contracting, insecure work and labour hire, the erosion of worker entitlements, exploitation, unfair contract terms for subcontractors, unconscionable conduct towards subcontractors and their workers is absolutely rife. “It wasn’t that long ago that builders would tell the developers (including governments) what it cost to build. Over the years, we’ve seen a complete reversal where the developers have the upper hand. “Now, greedy developers are having a field day. They’re making margins in the 20 per cent range or more, while builders are down to single-digit margins and some contractors are taking jobs at a loss to try and maintain some cash flow until a proper job comes through.” Mr Buchan said there was “very deliberate undercapitalisation (when there is insufficient capital to conduct normal business operations) of the entire industry”. This meant that those “proper jobs never come”. “It’s just not sustainable, and the whole industry has a responsibility to fix it. If we don’t then it’s a matter of when, not if, the next major builder will go under,” he said. “It is worth noting there isn’t a single builder in WA who hasn’t gotten caught up in this race to the bottom to some degree. ,” he added. “There is a very real perception that the industry in WA is not viable and that, to be competitive and win contracts here, you have to reduce build quality and margins, and therefore operate at a level of risk beyond a point that makes financial sense. That’s an extraordinary indictment on the state of our industry.” Mr Buchan agreed with Mr Gelavis that the Government had to take the first step by changing its approach, in the hope private developers would follow. “They’re the biggest developer in town. If we can get it right with the State Government, it’ll flow all the way through,” he said. The Government this week rolled out the second stage of its security of payment reforms designed to protect subcontractors in the event of insolvency on a project. “Subcontractors and tradespeople are the lifeblood of the building and construction sector and they deserve to receive timely and efficient payments for their work,” Commerce Minister Sue Ellery said when announcing the latest measures. Mr Buchan welcomed the measures but said they fell short of what had been recommended by the Government’s own review in 2018. “Ultimately, all of these are piecemeal measures that help ameliorate or reduce total exposure,” he said. “They’re marginal. They don’t actually provide proper security of payment. Only cascading trusts will do that; a proper system where money is put aside in trust accounts to make sure subcontractors are paid on time and in full in the case of insolvency up the contract chain.” Cascading statutory trusts are used in other countries to protect subcontractors who, at the bottom of the chain, have been the biggest losers in what has been a zero-sum game in Australia, especially when builders were winning work just to keep the lights on. Some subbies who weren’t paid by New Sensation Homes, which subsequently went bust last year, vented their frustration in graffiti on the company’s Perth building sites. Homes on hold The Property Council of Australia, which represents developers, was keen to point out that its members carried risks as well. WA executive director Sandra Brewer declined to comment on the MBA’s proposed reforms or its claims that builders carried an unfair share of the risk burden. “That’s their point of view,” she said. “Builders and developers freely enter into private business contracts. “I think we all share the same goal, which is a thriving, vibrant construction sector,” she added. “And in truth, that is very difficult and challenging at the moment. “(For developers) there’s risks in developing the product to the right standards, and to meet the market. There are risks in borrowing money. And that has been a really serious experience for developers in the last six months, who, perhaps in their feasibilities, hadn’t anticipated the rises in the cost of borrowing. “Provided they can get through all of the red tape... they then get to go ahead on their project, at which point they enter a private contract with a builder. That’s a negotiated agreement between two private companies a joint understanding of how the project will proceed. “A key player in that relationship is the financiers. Banks will often set the parameters of that contract. Banks would prefer a fixed-price contract. So even as much as the developer and builder might want a different type of financial relationship, the banks are very influential in that process of what they are willing to borrow against, because they, too, are managing the bank’s risk. “The income from a development isn’t until the very end, when it’s handed over to the end buyer. So the developer takes a great deal of risk in the process,” Ms Brewer added. “The challenge at the moment is to feasibilities. “There is the rising cost of finance and the rising cost of construction, but really the sales revenue of the finished product hasn’t escalated to the point that it’s covering all of those increased feasibility costs. According to Urbis Apartment Essentials, no new apartment projects were launched in the third quarter of 2022. “We know from speaking to our members that at the start of last year, there were around a third of apartment projects with approved development applications that were on hold. And that doubled over the course of the year because developers, even working with their builders collaboratively, are just not able to make it work,” Ms Brewer said. Last August, the Property Council estimated that 71 per cent of approved apartment projects were on hold, equalling 6674 homes. Given the State is also in the throes of a rental crisis, with increasing numbers of people competing over the lowest number of available properties since records began, who is going to build the houses and apartments to meet the high current demand, let alone accommodate WA’s expected 1.6 per cent projected population growth (about 40,000 people) this year? Where are all the doctors, nurses and other health workers the WA Government is recruiting from overseas — to ease yet another crisis — going to live when they arrive? The same goes for the thousands of international students it is trying to woo back to the State. Then there’s social housing. “The State Government’s got a big investment in social housing,” Mr Gelavis said. “But again, the challenges are around the ability of builders to engage because they’re busy doing their current work. Builders have implored the State and Federal governments similarly to attract skilled tradespeople from overseas to help build all these extra homes that are urgently needed. There’s just one drawback: all these workers will also need roofs over their own heads. Ms Brewer said her council had put forward its own policy recommendations to boost the State’s housing supply. A headworks fund, to enable sites that are currently unfeasible to be developed, is among the ideas being pushed. Headworks are the costs borne by the developer to provide power, water and sewerage infrastructure at a site. “Apartment and multi-residential projects regularly require developers to outlay significant up-front funds for headworks and other expenses prior to the project generating any substantial revenue,” the council said. “The high cost of providing for or upgrading power, telecommunications, drainage and sewerage, and water infrastructure can inhibit the feasibility of a site. “Supporting the up-front funding of headworks could enable sites previously considered unfeasible to progress. “The Property Council proposes the State Government invest in the creation of a headworks fund (which) could operate by providing direct government funding to unlock land or offering zero-interest loans to cover the costs of delivering headworks. The loans would be fully payable within six months of practical completion, enabling repayment at a time when the project is more financially viable.” “(It) would mean developers would not be required to debt fund headworks, improving the feasibility of the project, and reducing the need to transfer costs to the purchaser, hence supporting the ability of the market to produce more affordable products.” Overstimulated If the perfect storm of calamities wasn’t already lashing the industry during the pandemic, a well-intentioned move by the State Government backfired and made the situation worse. In June 2020, the McGowan Government offered $20,000 Building Bonus grants to homebuyers who signed up before the end of the year. It was part of a $444m million stimulation package to support the sector. The Federal Government had already launched its own grant program, offering $25,000 to Australians building a home or undertaking significant renovations. All up, eligible applicants in WA could secure up to $45,000 towards their builds. Unsurprisingly, there was huge take-up. But the State didn’t have nearly enough skilled workers to meet the demand. The home-building industry at the time was just coming out of a horrible five-year slump from 2016. In 2014, there had been 33,000 housing starts. By 2019, the number had more than halved and much of the trade labour base had deserted the industry, going to the mines, the east coast or retiring. Compounded by a grant requirement for work to start within a tight time frame, labour costs soared. The rates for some trades, like bricklayers, tripled. With materials and everything else going up in price there was a “cost and cashflow crunch”. Contracts were quickly rendered unprofitable. New Sensation Homes director Danny Coyne partly blamed ill-timed government stimulus packages for his company’s demise. Last May, the State Government responded to the local industry’s plight — exacerbated further by inflationary impacts from the war in Ukraine and difficulties obtaining engineered wood products — with a stabilisation package that included $30m million in relief to assist head contractors with rising costs on government projects, plus revised time frames. The trades and labour shortage is even more acute today. Tradies have left the residential sector for other types of construction work. Not only can they get jobs in the resources sector, but there are infrastructure projects like Metronet ready to embrace their skills and experience. It’s why some customers have waited three agonising and costly years for building completion. Perth is currently the most expensive city in Australia to build in, according to the International Construction Market Survey 2022. Mr Gelavis said the trades were very much an ageing workforce, which put extra pressure on the industry to “bring that next generation through with apprentices and training”. “But we’ve got to bring them into a sustainable industry (or they won’t stay). We need to reform the industry, we need gender diversity, we need ethnic diversity, we need better mental health,” he said. “(Supporting the reforms) should be a no-brainer for the Government,” he added. “We’re saying, here’s the way forward. We need everyone to put their shoulder to the wheel on this.” Disrupt or die Australian Constructors Association president Duncan Gibb agreed the industry needed radical changes to save itself. “Construction businesses once deemed too big to fail have failed,” he said. Insolvency can rear up quickly. Just seven months before the Clough Group went into administration, its chief executive Peter Bennett insisted it was on track for a profit. “The industry cannot afford to continue down the path of slow incremental change,” Mr Gibb said. “It is time to fundamentally disrupt how it operates. The ask is not just of government — all stakeholders including contractors need to play a part in fundamentally changing how they and the industry operate. “Government, industry and unions have the opportunity to leave behind the baggage of history and collaborate in service of a common goal.” Engineers Australia chief executive officer and former Infrastructure Australia boss Romilly Madew was equally emphatic in December. She said the sector was at “breaking point”. “Implementing reforms that overcome flaws in project planning, procurement and capability is long overdue,” Ms Madew said. A State Government spokesperson said it welcomed the MBA’s reform proposals. “Relevant government agencies... met with the MBA in early December to understand the recommendations and work collaboratively on solutions,” the spokesperson said. “Preliminary discussions have been constructive and highlighted several areas where government and industry have common objectives. “Government has already adopted some of the MBA recommendations or pursued initiatives consistent with their reform package proposals. For example, a balanced tender approach with a fair assessment of both qualitative and quantitative criteria, payments for unfixed materials and provisions for price escalation are already used by the Department of Finance. “Another example is the recommended reforms to procurement models, which has already been partially adopted and are likely to be used more while market conditions are volatile. “The Department of Finance occasionally uses contracting methods that are not based on fixed-price lump sum only, including those put forward by MBA, if it is warranted by the project’s circumstances — particularly where time frames are too tight to accommodate normal approaches. “The Department of Finance is also driven by value for money for taxpayers and is reviewing its suite of contracting documents to encourage greater use of these contracts and to make contracts more attractive to industry, particularly in the current market. “Finance Minister Sue Ellery will meet with MBA in the next few weeks, with that meeting to include further discussions about the proposed reforms.” “The McGowan Government has introduced a range of measures to support the building and construction industry and respond to recent economic conditions. These measures aim to increase protection for local home builders and homeowners and stabilise the building and construction industry,” the spokesperson added.

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Construction chaos: Building industry cries for reform as WA industry sends high-profile firms under

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investigation
Construction chaos: Building industry cries for reform as WA industry sends high-profile firms under