- Building costs are up 24% since the start of Covid, according to CoreLogic’s Cordell Construction Cost Index
- Signs include a builder prioritising new projects
- Experts say avoid quotes that seem too good to be true
Builders across the county have come under extreme financial pressure as rising costs have hurt building margins, forcing a constantly growing number of builders to go under.
CEO and Founder of Investor Partner Group, Moxin Reza, said the building industry started to run into problems when costs started rising.
CoreLogic‘s Cordell Construction Cost Index found substantial rises in the cost of building, finding a rise of 24% since the start of the pandemic. Material costs have also skyrocketed, with steel costing 49% more than pre-pandemic, according to the ABS.
Reza said after the huge amount of government incentives bought on to stimulate the economy, during the government-imposed lockdowns, builders initially secured new contracts with healthy margins.
He added that the supply chain issues also saw costs rise by 20-30% over 18 to 24 months.
“Builders struggled to raise prices simultaneously because of fixed-price contracts, resulting in contracts that became 30% costlier to fulfil,” said Reza.
“Additionally, builders’ lack of financial literacy and business management experience contributed to the collapse.
“Most builders come from a trade background, relying on cash flow rather than profits. As profits vanished, cash flow remained, keeping them solvent.”
Lag times hurting
Reza said builders adjusted prices to higher levels, but there’s a 1.5-year lag between finishing loss-making projects and recovering losses.
“Rising interest rates caused new build contracts to decline, leaving builders unable to recoup losses.”
“The options were to delay loss-making builds or declare insolvency.”
Moxin Reza, CEO and Founder of Investor Partner Group
“Builders working with developers are safer, as their margins are higher, and developers prioritise completing projects promptly.
“It’s the builders working with owner-occupiers who fall the risk of collapsing and not those working with developers,” added Reza.
The signs a builder is on the brink
Reza said there are several signs to help identify owner-occupier builders with cash flow problems.
“Builders who prioritise new projects over completing older ones and make lifestyle changes, such as downsizing their office or switching to a smaller car, may indicate financial difficulties.”
“To mitigate the risk of working with struggling builders, clients should establish clear expectations and conduct thorough research.”
Moxin Reza, CEO and Founder of Investor Partner Group
“Contacting the builder’s trades to inquire about their payment status and seeking guidance from authorities like the Australian Securities and Investments Commission and the Australian Building and Construction Commission can provide valuable information.”
He said customers in Victoria can consult The Victorian Building Authority’s Disciplinary Register for further research.
“Checking Google reviews is another helpful step, as builders with numerous negative reviews may be cutting corners due to cash flow issues.”
“Investing time and effort into research and protection measures before signing a building contract is crucial to avoid future complications.”
Be cautious about cheap quotes
Reza said people should also be wary of inexpensive builders, emphasising that if a builder’s quote seems too good to be true, there is likely a reason for it.
He said it is worth considering custom builders, who may require a slightly higher investment but pose lower risks due to their limited scale.
“It’s important to understand that struggling builders are not always at fault.”
“Despite the misconception that builders lead luxurious lives, many have faced bankruptcy due to significant losses by no fault of their own.
“Recognising the builder’s efforts to communicate in good faith and understanding their cash flow problems can help establish productive solutions.
“However, customers should prioritise due diligence to safeguard themselves from builder bankruptcies.”
Reza said that although collaboration with the builder to complete the project is essential, customers should know that builder bankruptcy can lead to increased costs, delays, and holding expenses for the homeowner.
“Taking initial steps to protect oneself can prevent future issues and financial burdens.”
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