The Australian Constructors Association (ACA) has released a report underlining the poor health of the building industry and the need for urgent intervention.
The report says building firms are entering administration at over twice the rate of other industries, with profit margins falling to 1% and liquidity to 5%.
Additionally, over 50% of all large builders now meet the technical definition of insolvency, with the ACA’s report citing an unfair transfer of total cost and design risk onto the seller – induced by ‘fixed price contracts’ – as the main driver.
ACA’s CEO Jon Davies said it was evident the industry is in trouble, with immediate government action required to create a more sustainable industry capable of building the housing and infrastructure needed by the nation.
“The building industry is a textbook example of market failure,” he said. “The basic lesson is simple: fixed price contracts work well when the buyer knows exactly what they want, and the seller knows exactly how much it costs to produce. That market is not construction.”
“In the building industry, all the uncertainty and risks are the responsibility of the contractor and, when those risks are realised, they are funded out of the contractor’s already razor thin profits,” he continued. “This practice of transferring all the risks to contractors under fixed price contracts has led to a deeply unstable industry.
The ACA report outlined three steps it deems as “key” to delivering a more stable building industry: involving the contractor in the design process at the earliest opportunity; not setting a formal cost at the start; and incentivising collaborative out-performance to share the risk and benefits.
“Changing current practices will create the conditions for improved productivity and a healthier industry,” said Davies.
“A profitable construction industry is in everyone’s interests and should be a key priority for all governments.”
The ACA is the national body representing Australia’s leading construction, infrastructure, and services companies.
The report was released on July 19, 2023 and can be read in full here.