The year is 2022 and the construction landscape has been dealt the perfect storm of events.
After two years of Covid-related pressures that severely impacted builders’ turnover and bottom lines, unprecedented rainfall and construction-cost inflation for labour and materials have further impacted construction sites and businesses in the eastern states of Australia.
It is never too late (or early) to discuss the Builder Financial Review services Newpoint Advisory undertakes and how we can assist in this rapidly changing construction landscape.
Greater Sydney Rainfall
The 2022 New Year brought another disruptive and increasingly prevalent factor to bear on construction sites—rainfall. In the first six months (181 days) of this year in Sydney, only 74 days were not affected by rainfall.
To make matters worse, more rain has fallen in 2022 than has ever been recorded by this time of the year:
For construction companies, weather-based pressures have been extensive and continue to impact financial performance. Delays caused by weather this calendar year have exposed builders to unbudgeted increases in preliminaries and overheads.
These weather events significantly impact projects both at early and late stages:
- Projects coming out of the ground, where sufficient environmental control measures are yet to be put in place and the site ‘de-risked’; and,
- Projects being completed where external works and landscaping are undertaken.
Newpoint Advisory estimates that wet weather in Sydney alone, has caused cost increases of 4% for medium/high-density apartment builders. Along with delay costs, the impact has seen many builders realising full year losses due to their second half performance.
Inflation of Construction Costs
There has been a lot of recent Press coverage of the impact of price rises on “Housing” costs. The focus has largely been on materials cost increases and does not take into account the proportions of materials and labour used in construction of a specific project.
Newpoint Advisory has been undertaking its own study, where labour and material costs and the quantities of each have been considered. We have analysed changes in the costs of these items using a live high-density metropolitan Sydney project with a total project cost of more than $150 million.
We have found that total project costs have increased by roughly 10% since June 2021. Construction costs in this case study are split fairly evenly between Labour and Materials at a ratio of 47:53.
Wage costs have increased by roughly 9% and materials costs have increased over 10%.
Key take aways from our case study regarding labour and materials are:
Finishing trades are a concern. In relation to waterproofing and tiling, labour costs are up 10% and waterproofing and tiling materials costs are up 10% and 14% respectively.
What Newpoint is seeing and how we can help (before, during AND after)
In extreme cases, builders are seeking to re-negotiate existing contracts and threatening to walk off jobs. These situations are difficult and need to be managed carefully. Common themes are:
- Builder originally underquoted
- Builder is taking similar action on other jobs
- Builder will not provide financial information
In relation to new contracts, the construction industry’s experienced and well-managed builders have identified the disproportionate allocation of financial risk and are reallocating risks to developers and other stakeholders through:
- Reducing periods for quote acceptance
- Increased allowances for wet weather and other environmental related issues
- ‘Rise and Fall’ provisions for some trades in contracts
The benefits to builders of this action may be given up over time, after conditions stabilise, due to competitive pressure.
Suggestions for engaging with your builder in the current landscape
Newpoint regularly advises builders, developers, lenders and other stakeholders in the construction process.
- Prevention is always better than the cure: You must know your builder.
- Undertake due diligence on the builder. Understand their business and the market price for your contract. The cheapest contract is not always the best.
- Where there are issues on a project, engage early.
- Consider disproportionate allocation of risk under a contract.
- It is important that all parties (builder, developer and financier) work together and are part of the solution. Take all practical measures to avoid the collapse of the builder during construction.
Newpoint Advisory specialises in builder delivery risk mitigation through detailed financial analysis. This enables financiers, developers and other stakeholders to make informed credit and investment decisions to manage risk and maximise financial performance.
Originally featured in The Urban Developer.