[+] Builders Need Fatter Margins to Safeguard Industry

“You can’t have it both ways, you can’t have low margins and a high-risk offering, it’s not going to end well for the client or builder.” Australia’s top construction firm is not crying poor, but Hutchinson Builders is calling for a robust conversation about margins and risk transfer as more tier 2 and 3 builders hit the canvas. The Urban Developer reported late last week that Victorian homebuilder Mahercorp had called in administrators while liquidators scramble to find a builder to take on collapsed Porter Davis contracts . Speaking at The Urban Developer’s BCI Construction League member webinar recently, Hutchies’ new business manager, Paul David, said he believed there needed to be a dynamic shift in the construction landscape. He believes it’s not just about profits, but the ongoing viability of the construction sector. “I think the average industry margin is about 1 per cent, we don’t believe that’s sustainable in the long term,” he says. “Scott Hutchinson our chairman has widely been reported as saying ‘We are living in a profitless boom’ and we are. “Clients say to us that anything more than a 6 to 7 per cent margin is gouging—but the sheer fact is to run a sustainable building industry we need to have, at least in my mind, a 5 per cent overhead margin. “That allows the builder to walk away at the end of the project with 2.5 per cent. But more so it’s all about the risk profile. It’s one thing to talk about margin, but you can’t have the conversation when you’re talking about risk, and risk transfer.” ▲ Hutchinson Builders are taking on place-making projects in Brisbane including 360 Queen Street and 205 North Quay, and the completed Calile Hotel. But Paul David says they are being “cautious” in which jobs they take on. Kapitol co-founder David Caputo also spoke at the webinar and says builders are being selective about the jobs and risks they are taking on. He says developers could face higher premiums as builders try to price up contingencies in an ongoing inflationary “snowball effect” that he says will roll through the industry over the next 12 to 24 months. “I can’t see margins changing, I can’t see how we can charge more,” Caputo says. “The reality is we’re all operating in that 3 per cent market. Everyone needs to understand too that we are a transactional market. “We take on that risk, we sell the risk downstream and we all clip the ticket on the way through. I personally can’t see this huge room for increased margin.” Industry ‘carnage’ in pipeline Caputo says there is “absolute carnage” in the industry and expects there will be more pain over the coming months. “What really concerns us is all the long-term mega projects out there that were signed up three years ago and are getting delivered today,” Caputo says. “We’re fortunate enough we don’t have any of that legacy but we scan the market with our subcontractors, we look at who is linked to those sort of projects. We actually see the biggest risks lying in amongst that, because something has to give,” he says. ▲ Kapitol Group co-founders David Caputo and Andrew Deveson are forecasting more “carnage” in the building sector as inflation and cost escalation continue to prevail. “You can’t really put your hand up for more money from a developer, you’re locked into a pretty hard number in a contract. So someone’s hurting. [Perhaps] the builder’s sold the risk really tightly downstream and the subbies are wearing it. But eventually I think a few of them are going to go pop.” ‘We haven’t seen that since the 70s’ Hutchies’ Paul David says bigger builders need a margin of 2 to 2.5 per cent to keep the lights on, and in the face of price escalations and labour supply challenges, pricing a job is difficult. “I think the whole industry has to take a fairly cautious view [of pricing projects]. It’s very hard, particularly over the last couple of years. The escalation in the industry that’s been rampant for the last two years is unprecedented. We haven’t seen that sort of thing since the ’70s.” He says there needs to be a bigger conversation about risk sharing across projects, and he believes more tier 2 and tier 3 builders will likely collapse in the coming months. And his forecast is borne out in the data. CreditorWatch data released recently shows external administrations in the construction sector are becoming more prevalent, now at their highest point since July 2020. Construction rolling external administration 2018-2023 The rolling 12-month average insolvency rate is now at 0.7 per cent in the construction sector. “It is the cost side that is really damaging to this sector at the moment, with many projects being completed at a substantial financial loss to the builder due to the price the owner pays being fixed at the time of contract signing,” CreditorWatch chief economist Anneke Thompson says. And there are no signs of slowing down with CreditorWatch data indicating there were further insolvencies to wash through the market. While rolling data shows construction has still not reached pre-pandemic rates in excess of 0.8 per cent, the trend is on its way up. Newly released statistics from ASIC show 1538 construction-related companies have entered administration or had a controller appointed in the nine months to March 26—dwarfing the 818 company collapses recorded for the same period last financial year. While there is no industry standard around what is an acceptable margin, builders are acutely aware of the risk-versus-reward metric underpinning commercial decisions. But bigger margins could provide a cushion that would absorb shocks in the market and ensure Australia’s building projects continue to get out of the ground. To access more exclusive content and events join our growing TUD Plus membership. Click here to learn more.

[+] Builders Need Fatter Margins to Safeguard Industry

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