Assurances about the viability of Metricon don’t change the fact that home builders are trapped between inflationary forces and fixed price contracts.
Outside of Prime Minister Scott Morrison and Labor leader Anthony Albanese, there would be few people feeling more pressure in Australia right now than Peter Langfelder, the acting chief executive of Australia’s biggest volume home builder, Metricon.
Just days after the sudden death of CEO and co-founder Mario Biasin, and hours after a much-publicised meeting between Metricon and Victorian government officials, Langfelder fronted the media in an attempt to quash growing rumours the business is in financial trouble.
Home builders have seen their already skinny margins put under more pressure. David Rowe
It started well enough, with Langfelder dismissing any concerns about the viability of the business.
“Our business has been very strong for 45 years and will continue to for a long, long time to come,” “Metricon has long-term viability,” he told journalists outside a Melbourne building site.
“We’ve got a strong history of performance. All our contracts in place are profitable. We’re completely up-to-date with all our trades, our suppliers, our employees, commissions – everything is completely up-to-date. We’ve got an incredibly strong management team. We’ve got an amazing staff. We’ve got trades and suppliers who have been loyal with us.”
But to mangle Shakespeare, Langfelder may have protested too much. The obvious question soon arrived: if Metricon is unequivocally trouble-free, why was the Master Builders Association warning the entire residential construction sector is facing supply shortages, skills shortages and input price increases?
Langfelder adopted a more realistic tone in response.
“I’m not saying everything’s fine,” he said.
“There are challenges. I know there are labour shortages. There are some delays and customers do need to be patient with all builders. The industry is going through a pretty tough time, as many industries are. So, I’m not skirting around that. There are challenges in the industry, and we’re not immune to it.”
Whether Langfelder has put to bed speculation about Metricon’s future remains to be seen, but you can be certain Scott Morrison will hope Metricon’s situation does not get any worse before Saturday’s election.
Still, it is clear the Metricon mystery has shed fresh light on yet another fragility in Australia’s housing sector. At its heart, the pressure on residential construction is a problem of seemingly unstoppable forces meeting apparently immovable objects.
Volume home builders have always operated on historically skinny margins, but the broad consensus of those inside the sector – and importantly the insolvency specialists trying to nurse struggling construction companies through this current crisis – is that the eternal juggling act between growth and profitability has become much trickier over the last three years of the pandemic.
The federal government’s HomeBuilder grant was designed to stimulate demand during the pandemic and did its job well; as of mid-February, the scheme had received applications for 113,113 grants for new home builds and 24,642 grants for renovations.
Volume home builders leapt at the chance to sign up new customers, typically on the fixed-price contracts that are standard throughout the industry.
But the viability of these already marginally profitable deals has come under severe pressure amid surging costs for construction materials (caused by pandemic-related supply chain disruptions) and rapidly rising labour costs (caused by labour shortages) that have pushed new home build costs up by at least 20 per cent.
One insolvency professional, who now finds himself in control of two construction sites in Sydney, says there is a third pressure that is less understood: time.
In order to make fixed-price contracts work, most builders assume their jobs will run to time and typically leave little room for delays. “These guys always believe their timetables will be almost perfect,” the insolvency expert says, with more than a hint of bewilderment in his voice.
What the pandemic has brought, of course, is abnormal delays. Our insolvency expert says the delays caused by the NSW government’s snap lockdown of buildings sites last July are still felt. Nationally, COVID-19 cases and close contact rules have caused ongoing problems with labour availability, while material shortages have been another source of delays.
In construction, time is money. For example, the longer a piece of kit has to remain on site – be it a generator, a crane, a portable toilet or safety fencing – the more it costs. An extra week might be manageable, but over months the hit to profitability becomes substantial.
And with fixed-price contracts standard, builders have relatively few options to pass through rising costs.
This basic story – unstoppable inflationary pressures meet immovable fixed price contracts – has been at the heart of several recent construction collapses, including Probuild, Condev and Privium.
But there could be a new pressure on volume home builders in the form of rising interest rates. Again, this is about time.
Developers say they have already seen a slowdown in inquiry levels and purchases since the Reserve Bank of Australia raised interest rates at the start of this month.
While demand hasn’t necessarily fallen away, deals will likely take longer to complete, which in turn means customer deposits, which are often used to fund working capital, come in more slowly.
“It’s more grit in the wheels,” one source says. And it couldn’t come at a worse possible time.
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