‘I bet more builders go broke'
More builders will go broke in Australia because of its unique contracting system that loads all the risks of a project on to builders, says Scott Hutchinson, the chairman of Queensland’s biggest building company, privately owned Hutchinson Builders.
Under the local system, developers typically put all risks of delivery, weather and below-ground conditions on to a head contractor’s shoulders, making them more vulnerable than their counterparts in the UK, where developers are often required to put in capital, Mr Hutchinson said.
Despite the high demand for building services prompting clients to take on more risk as they compete to attract contractors to their projects, the scales would tilt back towards developers as work fell and there would be no shortage of builders that would keep agreeing to terms that could put their entire business at risk, he said.
“I bet more builders go broke in Australia because of it,” Mr Hutchinson told The Australian Financial Review on Thursday.
“They’ll roll the dice with their fingers crossed every day of the week.”
Construction insolvencies are creeping up. The latest figures from corporate regulator ASIC show building-industry companies going into administration rose to 164 in June, up from 153 in May and 40 per cent above the June 2021 total of 97.
The current market environment is giving contractors scope to push back on certain risks – such as on the financial cost of extreme weather events like cyclones – and some developers are also adopting a more collaborative approach with builders to identify and share risks.
But builders, such as Brisbane-based Wiley, say many developers still have unrealistically low expectations of what margins builders should be able to charge on projects and insist on project terms many builders say are unsustainable.
Developers, in turn, say they are subject to rules laid down by their lenders. Mr Hutchinson said that was true.
“My feeling is that developers are larger entities [in the UK] and they supply a lot of their own finance,” he said.
“Here the developers appear to be very small and clever and light on their feet but don’t have a lot of financial backing, so they use mezzanine financiers.”
“What’s driven it here is the financiers and banks – but mostly the mezzanine financiers that hate escalations,” Mr Hutchinson said.
Mezzanine finance is a higher-returning – but riskier – form of credit that ranks behind the senior, or bank, debt for repayment. These financiers were pushing risks such as soaring materials costs on to builders, he said.
“They’re the ones that put the tough money. They get 20 per cent [margin] on their money. If costs overrun, they’re the guys that lose their money first.”
Andrew Schwartz, the managing director of non-bank lender Qualitas, said Australia’s system of design-and-construct contracts that gave all responsibility for delivery to the principal contractor, was efficient because it clearly laid out responsibility.
The party that did the work had to be responsible for it, Mr Schwartz said, likening construction to a medical procedure.
“You wouldn’t want the patient responsible for the surgery outcome … yet the person bears all the pain of bad outcome!”
Mr Hutchinson said the Australian system wasn’t necessarily worse than those of other countries, but it just meant developers should choose larger, better-capitalised builders that could bear the risks.
“Hutchies” is one of the country’s largest contractors. In February, Mr Hutchinson said the company, which drew in revenue of $2.7 billion last financial year, was likely to top $3 billion for the year to June. The latest financial statements have not been published.
Mr Hutchinson, like Multiplex chief executive John Flecker in an interview last month, said the current phase of greater risk-sharing between builders and clients would come to an end.
“As soon as the work gets tight again they’ll take the risks,” he said. “Probably in six to seven years it will go back to where we’re copping all the risks again.”
