Australian Construction Insolvencies on Track to Surge Amid Costs Spike

December 27th, 2021

Awake Goy

One of Queensland’s major building companies BA Murphy Constructions, has been put into liquidation just before Christmas, adding to a growing list of insolvent builders nationwide. The collapse came amidst the deepening concerns that the ongoing surge in material and labour costs will see more construction companies go under in the coming months.

According to the notice on corporate watchdog ASIC, BA Murphy made the resolution on Dec. 21 that the company be wound up and that liquidators be appointed.

The move, which followed the loss of its licences earlier the month for failing to pay subcontractors, has left millions of dollars worth of projects unfinished. It is estimated the company could owe up to AU$3 million (US$2.17 million).

BA Murphy is just one of a string of big construction casualties of material price hikes, labour shortage and harsh lockdowns, as many builders have secured work at fixed prices without factoring in the amount of profit margin needed to keep business going.

In November, another prominent Queensland builder, the Privium group, was placed in voluntary administration with debts of more than AU$28 million (US$20.23 million ). The firm, having completed 600 projects in Queensland, NSW and Victoria, blamed the harsh operating condition induced by the pandemic for its failure.

“The last six months have been very difficult in our industry with the continued supply and demand challenges, significant price increases and ongoing lockdowns in Victoria and NSW,” the company said in a letter to its shareholder.

The same month also saw Melbourne’s high-rise builder ABD Group and its subsidiary Marcus Group go into liquidation, leaving an estimated up to AU $80 million (US$57.79 million ) in outstanding debt.

In October, over ten builders in Melbourne were put into administration, including the luxury builder Built by Guild.

The boutique builder, which is behind some of Melbourne’s most prestigious houses and apartments, was plunged into substantial loss in 2020 due to material price increase and cost overrun, from which it did not recover.

The surge in new builds and renovations, combined with supply chain disruption and labour shortage induced by the pandemic, has created a “profitless boom ”in the industry, with many builders ending up losing money.

Master Builder Queensland’s September survey on material/trade delay and cost increase has found that the lead time across all key building materials continues to blow out, and all respondents keep struggling with price increases across all building materials, especially timber, bricks and tiles.

The scarcity of key trades also contribute to cost increases, with one in five respondents are now paying their carpenters over 26 percent more and all having to pay bricklayers more.

“We have no chance in securing the subbies we need to finish our contracts now when they are being offered double what they previously were,” one respondent said.

“We are locked into our contracts, and we just can’t afford to match that,” he described the dilemma. “ We’ll go under if we do. We’re stuffed either way.”

Master Builders Victoria (MBV) expects more building industry failures in the coming months, which could be “a major issue for our industry moving forward.”

“As Victoria re-opens, MBV is expecting building and construction insolvencies to rise following the withdrawal of State and Commonwealth business supports coupled with the continued challenge of supply shortages and rising product prices,” MBV CEO Rebecca Casson said in a statement on Dec 21.

“It appears that the large increases in builders’ material and labour costs following COVID-19 shutdowns, combined with the reduced workforce capacity, is starting to impact Victorian builders significantly.”

The payment arrears period index also points to dim prospects for the building industry. According to Credit reporting agency CreditorWatch’s business risk index for November, the construction sector stands the highest payment arrears by industry, with 12.4 percent of firms in arrears by over 60 days.

The surging momentum is expected to continue.

According to CoreLogic’s The Cordell Construction Cost Index (CCCI), a quarterly measure of residential construction costs, the three months to September has seen an increase of 3.8 percent, the largest quarterly uplift since Q3 2000.

Corelogic head of research Tim Lawless said the quarterly rate of growth in construction costs doesn’t like a short-term spike.

“The surge in construction costs is due to the amount of construction activity that’s been approved at a time when we can’t import more skilled labour and are facing significant supply chain disruptions,” he said.

“This construction cost inflation could continue for another 12 to 18 months,” he predicted. “It’s unlikely the industry can absorb a cost increase this significant into their margins.”