Saturday, 4 June 2022

Developers starting to ask tougher questions of their builders to ensure they are safeguarded against any collapse.

“Developers are looking for builders with more robust balance sheets and parent company guarantees, so they can be sure that the uncapped liability that the builder signs up to can be delivered upon because when the builder goes into liquidation, the developer has to pick up the pieces in addition to the additional costs,” KordaMentha Real Estate Partner, Ted Fitzgerald says.

“We’re seeing situations in the market where builders are approaching developers and trying to share the burden of these cost increases, but developers are wary of setting a precedent and then not being able to control contagion risk in the industry.

They’re doing their best to survive the situation and I think the good and well-capitalised builders are sharing in the pain with their subcontractors, but it’s hard when multiple subcontractors have issues and the builder is on a tightrope with the developer on time and cost."

Fitzgerald says there are real economic headwinds facing the industry as well as a structural problem with how the sector operates.

“The structural issues stem from the transfer of risk down to those who can least afford it. That goes from developers transferring risk to head contractors and then head contractors transferring risk down to subcontractors.

“It’s the pushing of the risk down the line to those that can least afford it that creates this brittleness leading to a disproportionate representation of insolvency in the construction sector.”

Click here to read the full article by Sarah Danckert and Simon Johanson as published in the Age.