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The Residential Building Industry in Australia is Broken.

It’s a race to the bottom, that’s seen 950+ Victorian building companies go broke in 2023.

 

▲ There have been reports prices in the rate per tonne for excavation have increased by as much as 100 per cent.
The Urban Developer.

 

This article might get me into trouble…

This is not a winge fest. It’s simply a grass roots rundown on the “state of play” of the building industry.

For someone on the inside of this industry the economics are simple. The cost of doing business for builders is out of control and is not going to change any time soon.

There are just too many things at present that a builder cannot control. It’s evident to me that every residential building company is currently in a different phase of going broke.

 

“We all want a good deal, but sometimes we find ourselves being penny wise and pound foolish, resulting in a poor outcome for everyone involved.” Unknown

 

Two months ago, in email # 239 “The Real Cost of Builders Going Broke”, I stated the case that the building industry is specifically structured to accommodate builders going broke. Insolvency costs are amortized across all building projects in the form of compulsory Building warranty Insurance.

 

I get that this warranty insurance is there to protect the consumer, but anyone paying attention over the last 12 months has witnessed this warranty system is just not working. There are over four thousand building warranty claims currently being processed, twice the number of claims lodged in 2022. Resulting in thousands of home building owners are in a world of pain and the number of clients being left in the lurch is growing each day.

 

The residential building industry is currently experiencing a “perfect storm” of cost escalation, over regulation, and complex liability issues.

(Just today I was notified that two of the biggest building material suppliers, James Hardie & CSR are putting up their prices in February by 6% and 7% respectively.)

 

Government authorities, building surveyors and the insurance industry are all running for cover and fortifying their trenches, so anything short of a well-aimed bomb is not going to make any impact on this bureaucratic dysfunction.

 

So let me break down this perfect storm into digestible parts.

 

1. Residential builders are one of the only professions that has no liability insurance. Therefore, a builder is personally liable to cover the cost of any significant defects on each project for up to ten years. The cost and pressure this puts onto builders is immense and needs to change.

 

1. The only tradesman that are currently licenced and regulated are plumbers and electricians. All other trades are personally self-regulated and are not legally responsible for any of their work. But the builder is legally responsible for all workmanship on their projects.

 

1. The cost of insurance for a building project has more than doubled in the last 2 years. Insurance companies are holding residential builders to ransom.

 

1. Australia is in the middle of adopting a new National Construction Code (NCC). This is effectively a completely new set of building regulations, many of which will greatly increase the cost of building and renovating a home. Again, this is adding significantly to the cost of doing business.

 

1. Building surveyors are the watch dogs and gate keepers of the building industry. The NCC and recent government legislations have added extra complexity and liability to the role of the building surveyor. This has flowed through to builders in the form of more red tape, time delays and yes - extra costs.

 

1. The majority of building contracts are awarded by using The Tender System. 3 or 4 builders quote a project and generally the lowest quote wins the job. From my experience this system for appointing a builder is a “race to the bottom”, it’s a “loose loose” scenario.

 

My building company, DDB Design, avoids tendering for jobs and I have written several previous articles about why the tender system does not work.

 

I know that not tendering for new jobs has adversely affected the growth of DDB Design, but I also know it has greatly helped its financial stability.

 

The building industry has always been tough, highly competitive, and full of big brands, big personalities, and big egos. But it is also an industry that rewards hard working, well organised operators who always do what they say they will do.

 

Thanks for reading,

Stay safe and never stop swimming.

David