Construction industry faces a ‘reckoning’

Mounting pressure on the sector will continue, say experts

Construction industry faces a ‘reckoning’


By Jayden Fennell

The construction industry has faced many challenges over the past three years.

From navigating the threats of the pandemic, lengthy supply chain issues, to battling the surging prices of manufacturing costs, the industry is now facing a long-term “reckoning” as rising costs and interest rates bite, with the latest figures from the corporate regulator showing a jump in collapses in the sector, the Australian Financial Review reported on Monday.

Insolvency experts have warned that construction contracts signed before prices started rising and the risks sitting with contractors have added unwanted pressure on the industry.

Speaking to the AFR, McGrathNicol chairman Jason Preston (pictured above left) said he expected pressure in the sector to continue to rise, particularly for engineering, procurement and building.

“They [have] multi-year contracts, the contracts were signed some time ago and the cash impacts of costs going up and delays start hitting towards the middle and back end of the contract. We’ve seen recently fallout in the space and I think we’ll see more,” Preston said.

“That’ll drive consolidation in the sector and really, over time, more power shifting to contractors, so they can pass on some of the risks they’ve been catching in terms of inflation and labour costs because it’s not sustainable.”

KordaMentha partner Mark Korda (pictured above centre) said the collapse of Grocon, one of Australia’s largest building companies, included more than 80 companies across the structure of the business.

“They’re a little misleading, but the stats that are published by ASIC we know record low insolvencies when the pandemic started,” Korda told the AFR. “It was staggering, you were thinking ‘I’m going off to mobilise my people out of our other divisions and put them into restructuring’, and then nothing happened.”

Fixed rate mortgage cliff to hit

Meanwhile, consumer spending has defied expectations so far, following consistently rising interest rates, home values falling across the country and rising inflation to a more than three-decade high.

Baker McKenzie head of restructuring and insolvency Maria O’Brien (pictured above right) told the AFR the coming wave of mortgage holders shifting off low fixed-rate loans was going to result in a massive hit to disposable income.

“It will have to have impacts, particularly for retail, but also some adjacent sectors like hospitality,” O’Brien said.

Meanwhile, Korda said people might cut back their spending, or continue spending, but not have their savings go up the way they did during the pandemic, along with households preparing for having less disposable income with interest rates going up.

Brokers assist clients dealing with construction problems

Meanwhile, price increases for broker clients building new homes is becoming an common problem, says a Sydney broker.

Sphere Loans director Mirasol San Esteban told Australian Broker that many Aussies who had signed fixed-price building contracts and commenced construction or were waiting to start were experiencing price rises due to ongoing supply chain issues.

San Esteban said she had been working with multiple clients whose fixed-price building contracts unexpectedly increased and needed to source extra funds to proceed with their build.

“The hardest part is when the client does not have any leftover money to fork out for an unexpected added cost,” San Esteban said.

“The ongoing supply chain issues are adding time delays. Many of my clients who are building have signed their contracts with their chosen builder, settled on the land and are now paying the mortgage on the land but there is such a backlog of building materials, it is taking much longer for the builds to begin or progress.”

What do you think about the ongoing issues the construction sector is facing? Share your thoughts in the comments below.

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