Builders are going out of business in record numbers in Australia due to a perfect storm of fixed-price jobs and rising equipment and labor costs, experts say.
Between July 2022 and April 2023, 1,709 builders went into receivership – which insiders say can be traced back to the HomeBuilder grant introduced by the previous government in June 2020.
More than 130,000 customers signed up for the program, with builders mostly agreeing to take work on a fixed-price contract basis.
This means that when inflation hit and prices rose, builders spent more on materials and labor to get the job done than they had planned – to the detriment of profits.
Phil Dwyer, president of the Builders Collective of Australia said the stimulus worked so well it put too much pressure on an already “heated industry” by overloading builders with work they couldn’t complete.
Supply chain problems erupted in 2022, spurred by the Russian invasion of Ukraine, driving up world prices for building materials such as steel and timber.
Labor shortages also emerged, creating more demand for crafts, which paid them more and slowed the completion of work.
Along with a wave of wild weather in 2022 and rising inflation, builders had a huge backlog of work that cost them much more and took longer than they planned.
Sio and Maria Tupou were among 1,700 Porter Davis clients abandoned when the builder collapsed and they were not covered by insurance
‘We saw a huge spike in demand for new homes and renovations,’ says Denita Wawn, the CEO of Master Builders Australia.
“When the builders signed their contracts, which are normally fixed price, they didn’t anticipate the significant rise in inflation.”
“They knew the labor shortage would be bad, but they didn’t predict it would get this bad.”
“There is currently a fragility and volatility in the industry, which is due to companies working mainly on fixed-price contracts set before Covid,” she said.
Tim Lawless, CoreLogic’s director of research, likened it to builders being “oversubscribed” as homeowners scrambled to qualify for the grants.
An owner-occupier can receive a $25,000 grant under Homebuilder if they sign construction contracts before December 31, 2020 or a $15,000 grant if they sign before March 31, 2021.
For some construction companies working with a low cash ‘buffer’, pushing them into administration was enough.
“I only remember sitting there crying in the middle of a busy restaurant. I’m still emotional about it.’
Ms Tupou at a protest against Porter Davis outside Victoria’s Parliament in April
Sio and Maria Tupou paid $30,000 as a down payment to Melbourne firm Porter Davis, which collapsed in March, leaving 1,700 homes undeveloped, and assumed any problems would be covered by an insurance policy.
“When we tried to file the claim, we were told there was no policy. Porter Davis never took out insurance on our contract or build,” Ms. Tupou told ABC Radio’s Life Matters.
The Tupous have since had some good news with the Victorian government announcing a $15 million relief package and Porter Davis partial buyer pledging to complete unfinished houses.
Others are not so lucky.
There is now a plea to create a new criminal offense for companies that do not immediately take out compulsory insurance after paying the deposit.
Some 560 of Porter Davis’ clients were not covered by insurance despite paying off the construction giant before it went bankrupt, forcing the Victorian government to pay for the $15 million bailout.
There are calls for stricter regulations around construction insurance after the Porter Davis saga
In state budget estimates on Monday, Andrew Davies, executive officer of the Victorian Managed Insurance Authority, indicated that home construction insurance (DBI) claims are expected to double this fiscal year.
“That insolvency alone means we currently have more than 1,700 additional claims compared to what would be a typical year,” Davies told the Public Accounts and Estimates Committee.
The state insurer expects to handle a total of up to 2,500 claims from Porter Davis customers, about half of which relate to unfinished homes and the other half to defects within the six-year coverage period.
In NSW, not taking out property damage insurance is already an offense.
A builder must demonstrate insurance before requesting a down payment from a client on a project over $20,000.