Cracks in construction sector grow as cost blowouts bite

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Construction companies that made it through the pandemic because of COVID-19 support measures are in an increasingly vulnerable position as insolvency experts warn rising costs will continue to bite their industry.

Credit reporting agency CreditorWatch said on Tuesday that, while the rate of insolvencies in the building sector was yet to reach pre-pandemic levels, the cocktail of rising interest rates, increasing labour expenses and supply-chain cost blowouts meant more pain was to come in the sector.

The collapse of Porter Davis left 1700 homes unfinished in Victoria and Queensland.Credit: Joe Armao

Melbourne-based construction firm Interface Constructions was the latest builder to enter voluntary administration, with Hall Chadwick appointed to the company last week.

A string of high-profile collapses, including that of home builder Porter Davis last month, have shone a light on the pressure many operators have found themselves under as costs rise.

CreditorWatch data shows the rate of construction sector insolvencies in the 12 months to March was 0.7 per cent, and the sector is second only to the food and beverage sector for the risk of collapse. However, this figure is still below what the construction sector was experiencing before the pandemic, when more than 0.8 per cent of businesses faced insolvency.

Founder of data analytics firm Open Analytics James O’Donnell noted that financial assistance given to businesses during 2020 and 2021 may have delayed the demise of some building operators.

“These businesses are now appearing in insolvency numbers due to more expensive inputs, higher interest rates and rising labour costs,” he said.

CreditorWatch chief economist Anneke Thompson said many businesses were still working through projects that were priced before inflation took off, and those jobs were now likely to be completed at a loss, putting operators in a vulnerable position.

“There are still contracts entered into before COVID, and they are very, very problematic,” she said.

At the same time as rising costs, the value of construction work completed has also started to drop in all states except Victoria and Western Australia.

Thompson said a slowdown was also likely for engineering construction work as governments took a more cautious approach to large infrastructure projects in the face of rising costs.

“Projects that will consume a lot of construction labour and materials could be put on hold,” she said.

Building approval figures released by the Australian Bureau of Statistics on Monday showed building approvals declined across the majority of states in the March quarter.

Housing Industry Association economist Tom Devitt said the pain from the RBA’s consecutive interest rate rises was still flowing through the industry, while costs were having an impact on new projects.

“Multi-unit approvals in 2023 have recorded their lowest levels since 2012. The combination of construction cost blowouts, labour uncertainties, increased compliance costs and taxes on investors has seen approvals for multi-units stall,” he said.

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