Why greater flexibility and higher margins would make for a healthier construction industry

In recent times, we’ve witnessed the demise of a string of sizeable, reputable players. They include national home builder Porter Davis which folded in late March, leaving a reported 1,700 homes unfinished and a string of unpaid suppliers and subcontractors whistling for their money.

It came hot on the heels of other recent collapses, such as PBS Building which shut up shop in early March, and apartment developer EQ Constructions which went under in February, leaving creditors out of pocket by a collective $50 million.

Last year’s list of notable insolvents featured the likes of ProBuild, Condev and Oracle Building Corporation, all of which imploded in a similarly dramatic fashion.

The boom-bust merry-go-round

There’s been commentary aplenty about why this is happening. Inflation, rising material costs and staff shortages have purportedly created unprecedented challenges, yada yada yada.

To which I say, seriously? Yes, those factors have undoubtedly combined to create perfect storm conditions for construction companies striving to break even or turn a modest profit, but unprecedented? Hardly.

From where I sit, having bought, sold and developed commercial and residential property on both sides of the ditch, the building industry’s boom and bust cycles are as inevitable as death and taxes – and almost as depressingly regular as the latter.

They come round like clockwork, once every 10 or 12 years, and the way the industry is configured is a big part of the reason.

The long, slow road to approval

Getting a property from concept to construction stage can be complex, expensive and very, very slow. Projects that take 10 years, from go to whoa, are not uncommon, and those that take as long as 20 years not unheard of.

Consent processes which all too often require a feeding frenzy of consultants to get projects over the line are part of the problem. Regulations are necessary and desirable to protect the public and preserve the amenity of cities and neighbourhoods. But when complying with them is extraordinarily protracted and expensive, the market can change in the interim.

If it enters a downturn, a project may become less attractive, and more likely to make a loss. By that stage, however, proceeding can be cheaper than pulling the pin. Hence, we see developers moving ahead with projects on the basis that they’ll lose less money getting them off the ground than leaving them on the drawing board until better times return.

Greater flexibility and more off-ramps within ‘the system’ would make it easier and more acceptable for developers to hit pause, rather than pressing on regardless.

Miserable margins

Builders, meanwhile, have long made a habit of running on absurdly thin margins – 5 per cent is not uncommon – and looking to future projects to make up any past losses. They’re required to guarantee prices in an environment in which material and labour costs are not fixed but, rather, can fluctuate wildly.

To generate the cash flow they need to keep going, they need to win more and more work, and in order to do that, they need to enter highly competitive bids.

Racing through a project to save the previous one typically means building to a lower quality; cutting corners, screwing subcontractors down on price and trading, if not insolvent, then certainly by the proverbial teeth skin.

It’s a risky, unsustainable modus operandi which all too often ends in disaster, a la Porter Davis and co.

It’s my belief there would be far fewer collapses if the norm was an environment in which builders were expected to make healthier margins and, hence, had the luxury of being able to make rational decisions about the contracts they accepted.

And that would be all to the good, for all interested parties – investors, developers, end customers and construction companies themselves.

Desperately seeking sustainability

That’s my diagnosis – but what’s the chance of a cure? How likely is it we’ll see the construction industry transformed from today’s hot mess into a stable, sustainable market, one in which company collapses occurred but rarely?

Your guess is as good as mine. But one thing I know for certain: until it occurs, the boom and bust cycle is likely to run and run.

Peter Rose is a director at Forbury.