The string of construction company failures across south-east Queensland and nationally over the past year, hastened by surging input prices, has pulled down both giants such as Probuild as well as small home-building franchisees and triggered scrutiny of the risks shared and pricing charged in Australia’s contracting markets.
Many developers underestimate builder’s margins, as they look at a contractor’s published earnings figures – Wiley, for example, made a net profit of just $2.9 million last year, implying a 2 per cent profit margin – but such a figure is not comparable with a project margin, Barron says.
“One number is a reported profit margin on real events inclusive of tax and the other number is a proposed risk margin for the obligation to assume risks relating to the creation of something that does not exist,” he says.
“Starting margin rarely, if ever, matches the finishing margin because the contractor always takes responsibility for at least one risk that crystallises in a negative result.”
But sharing more risks would make it harder to secure finance under the rules many banks use and paying more will push up the price of assets for end purchasers, developers say.
“If you look at the sort of contract financiers typically require, they generally need a fixed price and a fixed time contract with liquidated damages built in,” says Maxwell Shifman, national president of developers’ body UDIA.
There has been some discussion about more openness to different contracting methods, but taking on more risk would be hard to price and more expensive at a time of already-rising costs, Shifman says.
Barron says that in an industry where builders have been conditioned to accept low margins they must think of contracting like a futures contract – to deliver an asset at some point in time – and price the risks around that accurately.
“We’re selling certainty to our client,” he says. “If we’re giving certainty to our client, what’s stopping the client paying for that certainty, or what’s stopping us asking the client to pay for that?”
Contractors should not have to bear risks they cannot control, such as weather or subterranean conditions that could affect progress. This would also help bring an end to the system in which head contractors push as much of their own risk on to the subcontractors they engage, Barron says.
“We’ve been conditioned and trained in this business to accept low margins instead of pricing risk in the appropriate dollars,” he says.