When Things Don’t Go To Plan
The pressure on Australia’s construction companies has been steadily increasing since the start of the pandemic. In 2021-22 alone, there were 3917 administration appointments in Australia with construction sector accounting for a startling 28% of all insolvencies.
This pressure, well documented by the press, has resulted in several large and well-known construction companies entering administration (both voluntary and non-voluntary) and liquidation. Notably, this includes companies such as Probuild, Dyldam Developments and Condev Construction.
The pressure on these constructions companies can be characterised in the following terms:
- supply chain disruptions;
- increased cost of building materials;
- skilled labour shortages and the resultant increased cost of labour hire; and
- a traditional reliance upon fixed-price contracts.
The reasoning for supply chain disruptions and the increased cost of building materials is predominantly affixed to the impact of the pandemic and reduced freighting.
The problem of skilled labour shortages and reliance of fixed-price contracts however have a different origin.
The skilled labour shortage has been a concern for over a decade; with statistics evincing a drop from approximately 412,787 apprentices in trainees Australia wide in 2013 to just 341,385 as of June 2021. A construction company’s bottom line suffers when all its employees are on tradesman wages as opposed to having several apprentices they can pay at lower rates.
Fixed-price contracts have long been the means of securing work for construction companies, especially in the residential sector. However, in today’s climate, this has created a substantial problem for construction companies; as profits forecast have not crystalised due to increased cost of sourcing materials and labour.
Consequently, the detrimental impact on construction companies has been considerable, and the outlook for some particularly dire.
While the named companies are commonly known for their large-scale developments, such as Probuild’s halted development W Sydney in Darling Harbour. Numerous smaller scale builders have also entered administration or liquidation leaving ordinary Australians stranded with half-built houses and lost deposits.
Several large companies specialising in residential work including Hotondo Homes Hobart, Pivotal Homes and New Sensation Homes have entered administration or liquidation; collectively leaving massive liabilities and many Australia families with half-complete homes and nowhere to go.
So, in an uncertain climate, what can you do to protect your investment?
The starting point is contract review. Off the plan purchase contracts should always be reviewed. Often the terms are onerous or oppressive on one party, whilst being unduly beneficial to the other.
There are of course, primary considerations and aspects of a contract which require particular attention. We have identified 4 key contractual considerations for prospective purchasers.
Firstly, sunset clauses. Sunset clauses enable builders to rescind an off the plan contract; and keep the deposit if the subject lot is not created by the nominated sunset date. In recent times there have been several reports of purchasers losing their deposits subject to sunset clauses.
This is preventable.
Secondly, progress payments. Progress payment clauses must be reviewed in detail, as the purchaser you should be aware of precisely what payments are due at what stage of the build. In our experience, contracts often stipulate the wrong figures or include miscalculations. There are various provisions within the Building and Construction Securities of Payment Act 1999 (NSW) which govern how a progress payment should be requested and when they fall due.
Thirdly, the special conditions. Special conditions are incorporated into a contract and often have the effect of superseding, deleting, or varying the standards conditions of a contract stipulated by the Conveyancing Act 1919 (NSW). For instance, the builder may have inserted a special condition seeking to reduce the defect liability period. A prudent purchaser will always be on the lookout for such special conditions; it often falls to a solicitor to propose suitable changes to protect the purchaser. If your contract has special conditions, please call us.
Fourth and last is a matter of due diligence. A buyer should always ascertain the position of the company they are dealing with. Do not enter a contract for an off the plan development where there is a concern as to the company’s solvency.
At Green & Associates, we are experts in applying for no convictions and have an excellent success rate in achieving this for our clients. Regardless of the charge, we are ready to be in your corner and assist you during this uncertain time. If you or someone you know needs assistance with a similar case, contact our office today.
