Home builders locked into loss-making fixed-price contracts are looking for ways to pass on costs that have risen as much as 30 per cent over the past year.
The country’s volume builders wanted more flexibility over pricing in contracts, Housing Industry Association chief economist Tim Reardon said.
“We’ve seen an increase in the cost of building a new home [and] I would expect to see a lot more builders moving to more flexible contracts and extended timeframes in order to mitigate the risk,” he said on Thursday.
“Builders have ways in which they can respond and that is putting in additional caveats, either in a fixed-price contract or moving into a ‘cost-plus’ contract.”
Soaring demand – boosted by the federal government’s HomeBuilder scheme that ended last year – along with globally fractured supply chains and labour shortages have left the building industry struggling.
Tasmanian Constructions, a franchisee of Hotondo Homes, went into liquidation last week with unpaid business debts of about $1 million excluding money paid by customers for building work not completed. It has 40 unfinished homes on its books.
It was the latest in a string of failures – including Privium, ABD Group and fellow Hobart builder Inside Out Construction.
Liquidator Jarvis Archer from Revive Financial said supply chain delays ultimately created a terminal cash flow crisis and that fixed-price contracts were not to blame for the company’s demise. But the industry was going through a time of stress, Mr Archer said.
“We’re hearing from long-term operators that they’re experiencing difficulties for the first time in 20 to 30 years,” he said.
The ability of builders to lift prices may be limited, as state and territory laws limit changes that can be made under fixed-price contracts.
Master Builders Australia chief executive Denita Wawn said construction costs had risen by 20 per cent to 30 per cent in the past 12 months, locking many builders into a loss on existing contracts, and said the relevant legislation should be reviewed.
Ms Wawn also said building industry insolvencies were the highest they had been for two years. “That is concerning us and we are keeping a close eye on it,” she said.
The HIA’s Mr Reardon, however, said he believed most builders would trade through the current boom.
“I do not anticipate a substantial change in bankruptcies within the industry in 2022,” he said.
Liquidator Mr Archer said the builders remaining in good shape were the ones that had not overloaded on work.
“It appears that the builders that have retained steady workflows, similar to their historical levels, are less financially exposed than those that have sought to take advantage of the rapid increase in work.” he said.