The recent news about the demise of a construction giant has caused shock waves across the industry, with a number of lessons that can be learnt.
- Set realistic and achievable contract terms. Despite having few firms at the ‘large job’ profile of construction companies, these competitors typically tender at sub 3% margins and often with aggressive time frames to complete. The latter being potentially more dangerous, given the material liquidated damages clauses in most contracts for overdue completion. This can lead to cost pressure on sub-contractors, creating variation claims if allowed and a conflict laden environment.
- Plan for ‘unforseens’ and build in contingencies. COVID-19 has not helped, especially as in most cases contracts did not allow this to be a delay event as a pandemic is not considered ‘an act of god’.
- Beware fixed price contracts (while attractive, they can be dangerous) and set agreed benchmarks and design parameters. Costs of supply and labour have gone up between 10% to 30%. We have a regime called Fixed Price Contracts – that means on a job that may be quoted two to five years before it is completed the increase in costs is the builders’ problem. So why agree to a Fixed Price regime? This is partly answered by another concept ‘Design and Construct’. With agreed benchmarks and design parameters the builder gets to ‘value manage’ – finishes can alter, design can change, but it can be difficult to determine a variation the builder gets additional payment for as opposed to a change which saves the builder some costs.
- Adjust for your ‘working’ environment. Public holidays, rostered days off (RDOs) and Leisure Productivity Days (LPDs), OH&S costs and associated compliance costs – are largely unique to the Australian construction landscape resulting in increased costs to the project.
- Impacts of rules and regulations can also be determinantal to margins. For example, poor insolvency laws which despite repeated review and reform allow builders to phoenix after walking away from responsibilities – numerous ‘cladding case’ examples have also negatively impacted across the industry.
The list above is far from comprehensive and the impact on the industry is too large and comprehensive to estimate. Subcontractors may lose hundreds of millions of dollars, developers will bear the costs for new contractors to take over the projects and provide warranties. Funders will ‘tighten’ their procedures around builders, not because they do not care but because you can price and assess builder risk, but you cannot eliminate it.
Working with partners and advisors who can bring extensive industry expertise to your business will help identify gaps and opportunities, especially pertaining to risk and risk mitigation strategies. Pitcher Partners is in the business of helping you assess and manage risk. Allocating the percentage of your wealth to the appropriate risk profile is your task. Assisting you with informed advice and industry specific insights is again a role Pitcher Partners proudly provides.
If there are other topics in property or finance you are interested in discussing please contact your Pitcher Partner practitioner.