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750+ Building companies have gone broke in Victoria so far this year.

 

Last week one of the biggest players in the Melbourne’s high end residential building industry went into receivership, leaving 20+ multi-million-dollar projects unfinished and hundreds of employees and contractors out of work.

 

This latest building business failure has left me dumbfounded and with so many questions.

 

How does this happen?

 

How can a seemingly unstoppable, 15-year-old, well-respected, high-quality building company just go poof and overnight cease to exist?

 

What will be the ramifications of this dramatic failure and who will be affected?

 

Firstly, let me give you some context from my perspective, as the owner and sole director of DDB Design P/L, a similar (but much smaller) architectural building company.

 

The last three years have been by far the most challenging period in the 33-year history of DDB.

 

There have been a few times I have seriously considered throwing in the towel myself.

 

Working harder than ever and no profit for two years was sole destroying.

 

But for me the potential downside of shutting up shop was eclipsed by the upside of pushing through this rough patch.

 

Walking away is not what DDB and myself stand for. Above all else I was compelled to stay true to DDB’s mantra “we always do what we say we will do”.

 

“Building warranty insurance is a tax paid by builders and their clients to cover the cost of builders going broke.”

 

At the end of the day, someone ends up paying for the cost of all the builders that fold.

This cost is ultimately paid by the public when they build or renovate a house, in the form of Building Warranty Insurance premiums which have more than doubled in cost over the last 2 years (currently costing approx. $10 000.00 on a $1.0m building contract).

 

I estimate that DDB has paid over $500 000.00 in Building Warranty Insurance premiums over the last 33 years, purely to cover the cost of other builders that have gone broke.

 

When a builder goes broke the client ends up the biggest casualty and is left holding the can. Overnight they find themselves without a builder and a half-finished house. The compound effect of thousands of clients being left in the lurch is a total lack of faith in builders and the authorities that oversee the construction industry.

 

“A broke mentality maintains a broke reality.” Uknown

 

The big question is, how can we prevent this from happening?

 

More regulations and red tape are not the answer to this complex issue and unfortunately, I am unable to solve this problem here and now. However, I feel compelled to put forward.

my thoughts on why building company insolvency is at an all-time high.

 

1. Three obvious reasons = 1, the tough economic conditions and material supply problems one year on from the pandemic. 2, Being locked into Fixed price building contracts whilst costs increased 25% in 18 months and three, a Shortage of skilled tradesman.

 

1. Growing too big too fast and not managing the cash flow. When work is plentiful, (I.E. more demand than supply) it is very important to be strategic and selective with the building jobs you take on.

 

 

1. More projects = more defects. All building projects have defects and more complex jobs have more defects. All residential projects have a ten-year warranty and building defects can easily compound over time and send the builder broke.

 

1. Flashy marketing and branding do not make up for poor management.

 

 

1. Soft skills are just as important as hard skills. Good leadership and a supportive business culture are just as important as good technical knowledge and business systems but are much harder to establish and maintain in a small business.

 

1. Delegation & responsibility. Building is a “hands on business,” one common denominator for builders that go broke, is that the business owner has become too distant from the day to day running of the building projects. Delegating tasks is very different from delegating responsibility.

 

“Fearlessness is getting up one more time than we fall down.”

 

Thanks for reading.

Stay safe and honour your responsibilities.

David