Since January 2022, more than 15 prominent Australian building companies have stopped construction, appointed administrators and terminated staff, affecting thousands of families, creditors, workers and customers.
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Sadly, this level of business failure won't end at construction. In order to circumvent almost certain business calamity across other sectors, all business owners, managers and customers need to view the construction industry as a cautionary tale.
So, what happened?
Ask anyone in construction and they'll tell you a story of supply chain issues and increased costs. We know supply chain challenges exist across many sectors. It's a global issue.
Increased costs are also a global issue, but they're particularly destructive to the Australian construction industry where most customers sign fixed price contracts, meaning the builder absorbs additional costs as prices rise during construction. Now, hold that thought.
Enter the pandemic stimulus HomeBuilder grant. This grant provides funding for people to build or renovate an existing home and was designed to encourage home owners to commit to a new build during the pandemic. The grants weren't huge in the context of the cost of a new build, but the initiative proved incredibly popular. At last count, there were 137,755 applications. That's 137,755 promises the construction industry was happy to make.
Builders were delighted by their projected future income, home owners were excited the government would pay some of their new house deposit, tradies were stoked to be so busy during the pandemic, and suppliers were overflowing with orders.
With their life savings in hand, plus some taxpayer money, potential home owners jumped on board, and then ... crickets.
Their land sat empty, perhaps a slab was poured, or a frame went up, but then ... nothing. Delays were caused by supply chain issues.
The government stepped in again, announcing less than a year after the scheme began, they would allow new home builds to be significantly delayed after the contract was signed, extending the construction commencement requirement from six to 18 months.
So, if you signed a fixed price agreement in May 2021 and paid a substantial deposit, the company didn't legally have to pick up a shovel until November 2022. Yet, more would-be home owners jumped on board.
Although trying to help the building industry with pandemic-related supply chain delays, the actual outcome of the construction commencement delay from six to 18 months forced the building company to absorb all additional costs as prices rose throughout the delays. Fixed price contracts were signed when money was cheap and cost of goods was low. Now, supply chain issues have worsened, interest rates are rising fast, and materials and labour costs have risen exponentially. The construction industry is in trouble.
As of March 2022, $2.1 billion has been paid by the Australian taxpayer in HomeBuilder grants. This went to construction companies who are now in administration, to fund builds, many of which have not even been started.
Unfortunately, no one stopped to think: "Hang on a minute, we might be in a bubble." And so the perfect storm blew over the construction house of cards.
But while everyone looks around for someone to blame, we need to remember one important fact, bubbles burst. Guaranteed.
I don't know what the answer is for the stressed-out builders and creditors, the suddenly unemployed workers and the devastated would-be home owners. It is a tragic turn of events and people have literally lost everything.
Although it's hard to see the silver lining at the moment, I hope we can all learn something from this.
No government can artificially prop up any business or sector without consequences. It's simple physics; every action has an equal and opposite reaction. So, when you see the next government handout or bailout, stop and think ... is this a bubble?
The other lesson is, as prices rise they must be passed on to the consumer. As painful as that is, it's the only way for everyone to keep their jobs and for creditors to get paid.
If a company is forced to absorb increases in costs of labour, production and distribution they will not survive, creating mass job losses and reduced competition.
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Stop and think about your employer, the businesses to whom you supply your products or services, or the businesses with whom you buy or trade.
If you are in business with someone, as a customer, a supplier, or an employee, your win can't be their loss.
If the business always loses, everyone eventually loses when the business no longer exists.
- Kim Fenton is chief commercial officer at The Extend Group.
