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Today was a dark day for the Australian construction industry with two major collapses at Lloyd Group and Porter Davis - companies that have well more than half a century of experience between them and have contributed greatly to the country's property sector in terms of economic output, civil amenity and job creation.
Unfortunately these announcements are part of a wider trend in a sector that has been beset by structural and supply chain problems for a few years now, with other high-profile victims - although not all suffering the same fate - including PBS Building, Probuild, Pivotal Homes, Next, Condev, EQ Constructions, LDC, Hallbury Homes, Pantha Homes, Delco Building Group, and countless more.
For Association of Professional Builders co-founder Russ Stephens, the liquidation of Porter Davis demonstrates why compulsory financial education is crucial for the industry.
"The problem is the big building companies with their large sales teams, they all signed up three, four, maybe even five times the number of contracts that would normally sign in a year. And that came off the back of the COVID, boom; the boom in demand during the back-end of 2020 and early 2021," Stephens explains.
"All those contracts were signed on fixed price contracts, which meant they lost money on all those contracts if they didn't renegotiate them before they commenced construction - that was the sensible thing to do.
"That's what we advised all our members to do. If you haven't started the build, renegotiate the price, give the client an opportunity to cancel and get their deposit back."
He says builders that didn't do that went forward with projects anyway, and some of them then tried to charge the clients halfway through the build.
"But a lot of these big builders, afraid of the adverse publicity, just carried on regardless. And because they signed so many contracts up, they couldn't build three or four or five times the number of contracts they would normally sign. What that meant is they got stacked," Stephens explains.
"So they took even longer to get to these builds and instead of taking a 20 per cent loss on all those contracts over the next 12 months because they weren't started half of them weren't started for another year.
"Eighteen months later, those cost increases compounded by 20 per cent a year so they lost even more money."
He says what that did was destroy all the equity in the building company.
"So, they're now running on fumes," Stephens adds.
“And because new construction is cashflow positive, they can get away with that and still pay their subcontractors and suppliers and no one is really any the wiser."
He notes that whenever there's a slowdown in the market, like what is happening now, everything starts to unravel - people want to get their money out, and there are not enough inflows to cover the outflow.
"Building companies do not lose 40 per cent of their revenue in a short space of time. In our opinion, the financials that have been submitted are most likely incorrect. That is why compulsory financial education is crucial," he says.
"We need compulsory financial education for both builders and accountants in order to address this problem so that accurate financial statements are submitted to the licencing authorities, giving the licencing authorities the opportunity to act on correct information, and cap licences earlier."
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