You won't believe the chaos unfolding in the Australian construction industry. Brace yourself as I reveal the jaw-dropping truth. According to the Australian Securities & Investment Commission's latest report, a staggering 2,075 construction companies sank into insolvency during the 2022-2023 period. That's right—over seven companies collapsed EVERY SINGLE DAY! Let that sink in. It's a mind-boggling figure that eclipses the entire total of 1,284 insolvencies for the previous financial year of 2021-2022.

Let's put this into perspective. The accommodation and food services industry, reeling from the pandemic's impact and rising interest rates, clocked in at 1,278 insolvencies. Meanwhile, retail traders faced 663 business failures. These numbers may sound alarming, but they pale compared to the construction industry's catastrophic situation.

My heart goes out to all the companies facing insolvency. Behind the attention-grabbing headlines of "another builder going bust," lies a trail of devastation impacting corporate teams, employees, suppliers, contractors, and their families. These individuals' futures, dreams, and even their homes, used as collateral to keep their companies afloat, now hang in the balance.

It's high time we face the cold, hard truth. Despite the desperate need for more housing supply, construction companies continue to crumble. Something needs to change, and it needs to happen NOW. We demand a rethink of the industry and urgent government intervention to save our construction sector. The time for a transformative shift is long overdue.

Why are they collapsing?

A range of economic conditions is causing turmoil in the construction industry. Most people in the industry and homeowners are acutely aware of the high cost of housing in Australia, as the industry assesses the consequences of their committed forward workloads, signed up largely on a fixed price basis and commonly 12-18 months before construction. However, what has further impacted and put pressure on builders is highlighted in this article and has been labelled a "perfect storm" by the University of NSW (UNSW).

For builders and contractors, the intense pressure can feel like it's coming from all sides:-

• Chronic labour shortages;
• Apprentices uncertain about entering the industry;
• Rapidly escalating materials costs squeezing job margins;
• Delays in material delivery times stretching working capital requirements;
• Suppliers circulating price increase notifications;
• Subcontractors reluctant to respond or unwilling to commit;
• Employees hinting that it might be time for a pay rise;
• Subbies ripping up contracts (literally) and walking away;
• Blanket rejection of price increases from suppliers and contractors, no matter how they arise;
• Increased bad debts as those further up the supply chain become insolvent;
• Increased advisory costs as businesses seek their rights concerning contract relief;
• Very little recourse available aside from expensive legal action;
• A new influx of overseas construction companies with standards challenges leading to lower quality and delivery at a lower cost resulting in high levels of competition on an unfair playing ground;
• Profits from construction work returning overseas and being removed from the Australian economy to fund industry support.

Dr Peter Swan, a banking and finance professor at the UNSW Business School, has also quoted: "Lax fiscal policies and massive printing of money by the RBA led to inflation. The cash rate has been raised from almost zero to over 4 per cent per annum. All of these changes have put pressure on builders financially, as has the decline in house prices... far fewer properties are being listed for sale," he said.

Brad Walters, head of product and rating services at data company Equifax, warns that more companies in the sector are likely to collapse. "In construction, they'll continue to climb because of the pressure the sector is under", Walters told The AFR on Tuesday. For another six to 12 months, it will continue to be a tough environment in the construction industry. A lot of people are watching the construction industry very particularly because of the trends we're seeing gather momentum".

The current trends and outlook in the industry:

• New home sales have been slashed in half by the Reserve Bank of Australia's (RBA) aggressive rate hikes and the hangover from the HomeBuilder stimulus;
• New home finance commitments have also collapsed, falling to their lowest level since 2012;
• Lending for construction and dwelling approvals have also fallen based on June 2022 – June 2023 comparisons;
• Fewer houses are being listed for sale due to declining house prices;
• Record immigration inflows are expected this year and the next as the recent budget puts a notably higher trajectory for net overseas migration at a cumulative 320,000 uplift over five years to FY2027;
• If the situation does not change, Australians are facing unprecedented housing (rental) shortages as demand outpaces supply;
• Projected high likelihood of late payments;
• Projected continuing insolvencies in the industry, where 9 out of 10 unsecured creditors get nothing back in an insolvency case.

The upside is that building delays have caused a record pipeline of homes still under construction, meaning builders will remain busy in 2023. However, because many of these homes were signed on fixed-price contracts, profit margins have turned negative owing to ballooning input costs. Hence, the sharp rise in insolvencies across the home-building industry will continue. 2024 is shaping up as an unmitigated disaster for the sector once the pipeline has been exhausted.

What Government Help has been offered:

Ah, yes, we've read a lot about the government's plans to increase the construction and supply of housing in certain sectors and a commitment to investment in infrastructure. Sounds great, hey? But read on.

There are certain issues and patterns that construction industries have in common in any country, regardless of their performance in individual markets. These include a high level of competition, low-profit margins for the quantum of risk taken on, an increased likelihood of late payments and a higher-than-average proportion of business failures.

There is some support for the unfortunate families left with unfinished homes in State Home Building Compensation Funds or similar schemes run by each state government. For example, the fund covers up to 20% of the contract cost in NSW. In Queensland, claims of up to $200,000 can be made, and in Victoria, up to $300,000. However, government intervention is not guaranteed after a builder goes bust. Queenslanders, for example, were not given the support in line with the scheme on offer in Victora in the case when Porter Davis went bust. However, this burden on taxpayers is ballooning as the industry struggles with complex and unseen circumstances.

Foreign Takeovers:

Notwithstanding the help offered to consumers, in the circumstances we're currently experiencing, the construction industry is calling out for government assistance. Australia's approach to competitive engineering and construction industry regulation has been notably "hands-off". This extended industry "boom" has seen a rise in the influence of major international contractors in the local industry, enabled by the widespread adoption of "mega-project" based procurement. These international contractors are based in countries such as Spain, Italy and China, where governments are more inclined to adopt an interventionalist stance.

For instance, the Italian government has recently supported the establishment of a consolidated contractor comprising the dominant contractor WeBuild and other local businesses. The proposed aim of the newly established "Progetto Italia" is to create a large and strong construction conglomerate to handle major local public works and be more competitive in offshore markets. A similar industry consolidation-based initiative was considered – although subsequently discarded – by the Malaysian government.

A significant event was the delisting of Australia's biggest construction group, Cimic, from the Australian Securities Exchange in 2022 following its complete takeover by Spain's Grupo ACS. It highlights the demise of locally owned construction companies, Scott Power, chief executive of Queensland's BMD Group, said. All of Australia's "tier 1" contractors are now foreign-owned, including John Holland (owned by China Communications Construction Company) and Lendlease Engineering (owned by Spain's Acciona), after a series of mergers and acquisitions over the past decade.

"Ninety-five per cent of the infrastructure being delivered in Australia above $500 million is being delivered by foreign contractors," Mr Power said. "It's just totally out of whack – we really need to shift that pendulum back." Australian companies have the potential to eventually lead bids for multibillion-dollar infrastructure projects if they receive the opportunity to develop their capability and capacity, Mr Power said.

Federal and state governments have been trying to break up big projects into smaller chunks to make them more manageable for smaller companies. But even when this is done, the foreign-owned tier 1 groups often win much of the work.

Construction of the new Western Sydney Airport's runway and terminal was divided into five contracts, but a joint venture between Cimic subsidiary CPB Contractors and Acciona won three of them. BMD and partner Seymour Whyte (owned by France's Vinci group) won a contract for landside civil and building works. Canadian-owned Multiplex won the fifth contract.

While BMD is pleased to have secured the airport work, Mr Power said governments should do more to get local companies involved in projects. "They actually need to express their desire to have mid-tier contractors in these packages by making it a requirement of the selection criteria," he said. "We'd like to see some clearer policy positions."

John Georgiou, chairman of Perth-based Georgiou Group and a director of lobby group Australian-Owned Contractors (which includes BMD as a member), said that if projects could not be broken up into smaller sizes because of technical requirements, then the Commonwealth should mandate that tier 1 and tier 2 companies be included on the lead contract. "Unless you require them to have a non-tier 1 at the top table, a lot of times they'll just joint venture with another tier 1," he said.

The Australian-Owned Contractors meet with government officials about three times yearly to air concerns. While the government has shown interest, the AOC has not seen "a proactive approach to making any changes", he said.

"Federal and state governments have been very supportive in principle. However, this has not translated into consistent or effective practices at the agency level," Mr Georgiou said.

Step Up and Take Action:

Enough is enough! It's time to face the harsh reality. While foreign companies have Australian subsidiaries and some employ local workers, the bitter truth is that the profits generated from these projects flow out of our country. It's a one-way street that needs to be disrupted.

Let's not turn a blind eye to the murmurs and observations echoing through the industry. Whispers about overseas workers failing to meet the rigorous Australian standards for construction have reached our ears. It's a wake-up call that demands immediate attention.

Now, it's the federal government's turn to step up and show strategic leadership. Here's what they need to do:

1.      Shift from reactive to proactive measures.

It's time to review their efforts in supporting victims of insolvency within the construction industry while addressing the root causes simultaneously.

2.      Develop robust policies that prioritise Australian-owned construction companies.
We need to ensure that our very own builders have a prominent role in shaping and constructing our nation's projects.

3.      Exercise tight governance over on-site practices.

Every worker on Australian soil must meet Australian Standards without compromise.

4.      Provide support:

By this we mean substantial and immediate increased support to construction businesses, enabling them to enhance their capabilities, capacity, and appeal to Australian workers and enterprises.

5.      Reassess current procurement practices.

It's time to prioritise Australian suppliers and contractors to strengthen our domestic construction industry.

6.      Utilise funding decisions strategically.

It's time to reshape the Australian construction landscape. Let's use our resources to empower local players and drive our industry forward.

The coming days will be crucial as we observe the approaches proposed and adopted by governments across Australia. We face relentless downward margin pressure, chronic business pain, and the growing dominance of overseas entities siphoning profits away from our shores. Expectations run high among both local and international participants for changes to our industry.

But here's the deal—it's not enough to sit back and watch. It's time for you to take action and have your voice heard. Share your stories, voice your concerns, and actively engage on behalf of the industry we hold dear.

Together, we can ignite change and safeguard the future of our construction sector. Let your voice ring loud and clear!

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Chantal Penny is the Director with Superpowers of SiteForce Recruitment. A thought leader in the industry, Chantal, based on her expertise and industry perspective offers unique guidance, inspiration and influence in the industry.

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