Protecting yourself against rising costs in the construction industry

In June 2020, the Federal Government announced the Homebuilder Grant with a view that the nation would build itself out of recession and homeowners would use money previously spent on luxuries, such as overseas holidays, to invest in the Australian dream of homeownership and renovations.

When initially announced, a key term of the program was that construction was required to commence within six months of the building contract being signed. In April 2021, Treasurer Frydenberg announced the program would successfully support $30b of residential construction projects. The timeframe for construction to commence has since been extended by one year to 18 months due to unanticipated delays in the construction industry caused by COVID-19 related supply constraints, including delays in global supply chains and recent natural disasters.

We have learnt from 2020/2021 that the world can be a very different place in 18 months and the supply shortages that were present in April 2021 show no signs of abating. The costs of key materials such as timber and the price of skilled labour remain on the rise.

These delays were echoed by industry participants, noting:

• Houses are taking longer to complete
• Builders are building twice as many homes but will make the same amount of money
• Builders are waiting substantially longer for key materials that took less than two weeks before the pandemic.

Why is this an issue?

While there are various ways that a consumer can contract with a builder, the most common for residential construction is a fixed price contract. It provides certainty of the overall project costs and incentivises the builder to finish the works on time. Under this contract type, the builder bears the risk for any risks associated with increases in labour or materials costs. In addition, the builder could be further penalised for delays if works are not completed by set practical completion dates, even if these delays are outside their control.

For builders that have signed contracts under the Homebuilder Grant, the clock is ticking for the mandated construction dates to commence. With no signs on the horizon that the costs of key materials and labour are set to fall, builders and developers should start proactive discussions with stakeholders, including:

• Negotiating with suppliers to secure supply chains
• Reviewing business operations to identify efficiencies and cost savings
• Investigating with financiers any capacity to secure additional working capital if contracts are budgeted to be ‘out of money’.

Under-budgeting a contract is one of the most common reasons a business can find itself in financial distress, some key tips to avoid this phenomenon include:

• Budgeting the right amount of staffing hours - both direct and indirect labour costs
• Anticipating there will be price increases and delays from suppliers
• Knowing when to walk away from a job if you can’t agree on a margin that works for you.

Do you need assistance?

BDO’s Real Estate and Construction specialists are ready to help. Get in touch to explore how we can help you.