‘Fragility and volatility’: Builders struggle under weight of fixed price contracts

“The government needs to take the necessary steps to ensure interest rates do not need to rise any further and take some of the heavy lifting of our correction off mortgage holders and business owners. From here, there are no easy choices.

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“There needs to be a conversation around fixed-price contracts and appropriate risk-sharing between banks, developers and builders.”

Max Shifman, the national president for the peak body for developers, the Urban Development Institute, agreed that a large percentage of work contracted to volume home builders would include fixed prices, giving little leeway for price increases.

“I would expect the vast majority of volume home builder contracts to be fixed price, though some have escalation clauses which apply if construction doesn’t commence with a certain period of the contract being signed.”

The collapse Porter Davis came just days after the UDIA warned of a housing crisis stemming from construction cost escalation and cost of living pressures.

In a report released on March 29, the UDIA said construction costs had soared by about 30 per cent in the past two years, throwing the feasibility of various types of residential projects into question.

‘There is fragility and volatility in the industry at the moment that has been a consequence of businesses working predominantly with fixed price contracts that were set pre-COVID.’

Master Builders Australia chief executive Denita Wawn

Shifman said the significant jump in building costs posed a problem for builders – particularly larger volume ones – which had taken on large numbers of fixed price contracts during the pandemic.

“If you signed a contract just before costs started to grow quickly, and then you’re building during a period where those costs are starting to come into play, that’s when you get into trouble,” he said. “In the case of someone like Porter Davis, if they’ve signed these contracts and couldn’t renegotiate them, then as they were building, they were losing money, and there’s only so long you can do that.”

The extent of construction cost increases have been particularly acute in Victoria where they have risen by 13 per cent in the 12 months to December, according to the UDIA’s report.

Last year, Australia’s largest homebuilder Metricon was facing financial difficulties after the sudden death of its founder and chief executive. However, the group was able to broker a last-minute life-saving deal with its stakeholders – including lender the Commonwealth Bank – after its shareholders pumped $30 million into the business.

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Several industry sources with knowledge of the sales process, who declined to be named so they could speak freely, said Porter Davis had engaged FTI Consulting as financial advisors to assist with the sale or rescue of the business before the appointment of liquidators from Grant Thornton.

The sources said that one plan canvassed by the company and its advisors included Porter Davis’ existing lender the Commonwealth Bank or a new bank providing a new financing agreement similar to Metricon’s rescue. But the group found no such support from new or existing shareholders, the sources said.

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