Friday, 29 March 2013

Going broke - the chronic problem with builders

Architecture is the mother of the arts. Yea. Architecture can exist in the realm of ideas, for years or forever, without a single built example. Yea.  Yada, yada, yada.
All else said and done, architecture exists when it is built, to be experienced in concrete 3D and the passing of time.  Architecture is not even just the finished object, but the whole process of procuring it, and launching it into its independent life.  Architects need to understand how that happens.  They need to understand, amongst other things, the chronically precarious nature of the building industry, the people and businesses that turn the ideas and the wheeling and dealing into buildings.
So it was with great interest that I read a series of interconnected articles, on the perceived need for major changes in the building industry to avoid the frightening rate of insolvency.  The discussion nominally centres on my home state of New South Wales in Australia, and therefore may not accurately reflect either the legal, or structural features under which builders operate elsewhere.  But I suspect that the core of the problem is recognizable nevertheless.

Simply put, building contractors generally can't pay their bills, until their own invoices are honoured.  As that is most of the time, in any jurisdiction that makes trading while insolvent a crime, the contractor should immediately go out of business, or at least be placed into voluntary administration.  Clearly, it can't be that simple, but on the other hand, it explains a lot about the sector, and it sounds bad.  Until you think of the knock-on effects; then, it sounds terrifying.  You realise how many creditors a construction contractor is likely to have, and what immediately happens to those sub-contractors and material suppliers.  The picture gets worse when you think further.  Depending on the scale of the project, some of those creditors can be big development/construction companies in their own right, who may be driven to the wall by a problem with one project, thereby leaving many otherwise healthy projects in dire straights.

Indeed, NSW Finance Minister Greg Pearce has spoken of the enormity of the issue:
“Between 2009 and 2011, hundreds of companies in NSW collapsed owing billions of dollars, slamming the brakes on vital projects and investment...Up to 24,000 unsecured creditors, including suppliers and subcontractors, have been left out-of-pocket, some by millions of dollars.”

Of course, any proper review will reveal other individual and systemic problems, such as shoddy financial management, under-quoting in aggressively competitive tenders, exploitation of employment and contract labour arrangements, even criminality.

No wonder that the peak bodies in the industry are calling for urgent review.  The rest of us should be vitally interested, because, surely such a flawed system is not sustainable.

For a pretty straight forward discussion of the issues, it is worth reading:
NSW Construction Inquiry After Major Insolvencies
Act Fast, Act Soon to Avoid Insolvency
NSW: Huge Need for Change to Prevent Construction Insolvencies
How Did 1,862 Construction Firms Fail?


1 comment:

Anonymous said...

The insolvency crisis suggests a few problems in the construction industry including the pay when pay clause and underquoting, and solutions should consider the type of project, contract, the construction market and the legal aspects, etc. Usually the architects have to issue instructions to the contractors constantly to change parts of the work to deal with site conditions and clients' needs. In such case, the quantity surveyor should progressively and constantly measure and value the variations and claims and ask the architect to certify payment on-account basis without waiting for full agreement. So once the architects certify the payment, the clients honour the payments.
Another solution is that claim contentious contractors may make use of this process to claim additional payments due to discrepancy amongst various parts of the contract. They may have included the price for the conflicts but merely make use of the problems in words to obtain more payment, that is, overquoting, exaggerating the claims by stating higher costs and values of materials to earn more profits. An example would be inserting high prices for the elements of work carried out at early stages of the project.
Inflations should be addressed in the contracts as well with fluctuations formula so prices can be adjusted according to the inflation indices. Any future changes in costs or risks should be shared between the two parties by some predetermined formula, hence to reduce the arguments and finally the contractors can be free from bearing risks or financial burden to pay for the risk items before getting paid.