In Australia there are more insolvencies in the construction sector than any other, and consumers are paying the price – ABC News

It has been four months since Nathalie Kapuya’s builder went into administration and still her land sits empty.

The mother of two bought a house and land package at Beveridge on Melbourne’s outer northern fringe in 2020.

“We thought it would be a home for us, for our children,” she said.

Her family engaged Queensland builder Privium to construct their first house.

But in November last year she was left “gutted” when she heard her builder had gone into voluntary administration, owing creditors more than $60 million and leaving homebuyers right across eastern Australia in distress.

In Australia, insolvencies in the construction sector are an all too familiar story.

The industry records more insolvencies each year than any other sector, with senior figures now sounding the alarm amid fears the trend will increase as builders contend with rising costs and labour shortages.

Privium CEO Robert Harder last year blamed the collapse of his building companies on the pandemic and rising supply prices in an interview with Channel Nine.

He did not respond to the ABC.

In its report to creditors, liquidators for Privium found it did face difficult market conditions, but noted the builder likely traded whilst insolvent from August until November last year.

The liquidators also reported “substantial payments of special dividends” to related parties, a large investment in cryptocurrency, what appeared to be the forgiveness of an $11 million loan and “a number of potentially uncommercial and unreasonable transactions” as all contributing to the collapse of Privium and its related companies.

The liquidator said it would cooperate with Australia’s financial regulator ASIC, while investigating the Privium collapse.

In Beveridge, Ms Kapuya said she had concerns about the builder for months before it went bust.

She noticed her house quite literally never got off the ground, with some plumbing the only evidence that the build ever started, despite the construction period running for five months.

Ms Kapuya’s build was insured through a domestic building warranty which builders in Victoria must take out for projects valued at more than $16,000.

That insurance covered 20 per cent of the price of the build cost.

While she has that insurance guarantee, Ms Kapuya has so far found it impossible to find a new builder to take on her project.

It means four months after Privium collapsed, Ms Kapuya is still paying a mortgage on land she cannot use and paying rent.

She still has no idea when she will be able to build her family home.

And with rising building supply costs, she believes she will not be able to build at the price she had planned for.

“We can certainly see that we will be out of pocket, which is another stress — just something we did not account for,” she said.

She has joined with other Privium homebuyers who are petitioning state governments to create greater consumer protections when a builder goes broke.

“A lot of these people are hardworking families, these are dreams that are crashing and we basically have to pick up the pieces and we just feel there isn’t a lot of support,” she said.

“It is a situation that should be looked at, homebuyers should be protected.”

In Victoria, the state government has commissioned an expert panel to look at the state’s building system, including consumer protections.

In Queensland, where Privium was based, there is also a mandatory insurance scheme for builders and security of payment laws which place financial requirements and reporting duties on contractors.

Family still counting the cost of builder’s collapse

It was in 2020 that Zainab Akhter bought a block of untitled land in Officer, in Melbourne’s outer south-east, with plans for Privium to build her family their dream home.

“That was for the double-storey house and land package,” she said.

At the time, the land and build was going to cost the family $650,000.

She wanted to move her family into the area in time for her daughter to start year 7 at a high school in the area.

But when settlement of the land was delayed by years, Ms Akhter bought a second block of land in Officer, with plans for it to instead become a short-term home for the family.

Again she engaged Privium to build that home.

But her family’s dreams became a nightmare late last year when Privium went into voluntary liquidation.

Ms Akhter worked two jobs to pay for a home for her young family, but said the sacrifices she made have been lost in the building collapse.

She found out after Privium collapsed that there was not any insurance to cover the deposit she paid for a build on her first block of land, because the land had not settled.

Ms Akhter was also left with a half-built house on her second block of land.

The rising cost of building meant she also could not afford to complete the home she had planned on.

The mother of two estimates Privium’s collapse has cost her family nearly $25,000 so far.

But she said her experience had shaken her trust in the building industry.

Lawyer fears for building industry, as risks grow

Monash University Professor Paula Gerber has spent more than 20 years as a construction lawyer.

While the Privium collapse is still being investigated, she said there were a number of factors that more broadly contributed to the building industry accounting for more than 20 per cent of insolvencies in Australia in recent years.

She said one of the big factors was the reliance on fixed contracts, which lock in prices before a build starts.

She said these contracts give homebuyers or developers peace of mind, but can leave builders unable to turn a profit.

“So if the owner is going to say ‘well, I signed up for you to deliver this house on this date for this amount of money and that is what you have to do’, well the builders will often have to go bankrupt because they can’t deliver the project.”

With war in Ukraine and the pandemic affecting supply costs across the construction sector, Professor Gerber said it was “inevitable” the industry would see “higher and higher” insolvency rates.

And in such a large industry, she said that spelt trouble for the country more broadly.

“When things start to go wrong for the builder, it really has a domino effect because all the people they are responsible for paying — their workers, their suppliers, their tradies — they all suffer and can’t be paid.”

She said now was the time for governments to consider reforms to strengthen the sector.

Professor Gerber said a “holistic set of reforms” was needed to protect homeowners when things inevitably went wrong.

One of her suggestions was for state governments to create a compensation scheme for homebuyers caught out by building collapses.

She pointed to Victoria’s former housing guarantee fund, which protected homeowners when builders went bust, failed to finish a project, or did defective work.

She also advised people building homes to negotiate with their builder if there were extreme or unforeseen cost blowouts.

“Construction is by its very nature very uncertain,” she said.

“There are all sorts of risks, what are you going to find in the ground when you start excavating? What the labour supply and building supply is going to be, all of these uncertainties create risk.

“The best way to manage that risk is through good faith negotiations between the parties, rather than sticking to the black letter of the contract when a problem arises.”

Building association says it’s time to act

The Australian Constructors Association represents large building contractors around the nation.

Its chief executive, Jon Davies, also has concerns about the climate the industry is now operating in.

“A lot of these companies are in a situation now where the sites were shut down for periods of time, they are having to wear that cost and they are also having to make up the time otherwise they are facing delay damages,” he said.

Mr Davies said builders were seeing price hikes that were sometimes running into the “double digits” and were affecting everything from labour costs to the price of materials like timber and steel.

He blames the industry’s historically high insolvency rates on the amount of risk builders carry when they are locked into fixed contracts.

Recent building collapses are likely to be far from the end of the industry’s pain this year, Mr Davies said, as a series of heightened risks for the industry collide.

“I think that [builders] Probuild and Condev really are just the tip of the iceberg.”

Source