Life After The Pandemic - What Knock-On Effect Has COVID Had On Our Construction Industry?
Author: Max Kozin
Published date: 2022/07
The construction industry has always been at the forefront of Australia’s media because of its significant overall impact on our economy. You might have noticed that recently that a lot of construction companies have been shutting their doors, and I believe this is just the beginning. The impact has been seen from major EBA commercial companies, subcontractors, and a few substantial residential volume builders in between.
With the stop-and-start nature of the last two years, all companies have seen a squeeze in their cash flow reserves. A company promising to deliver a project in its contract will most likely encounter penalties for the days/months missed from completion of the project. Because of the restrictions and delays, many companies have not been able to deliver their projects on time, thus delaying their payout and encountering countless fees.
One of the biggest impacts of COVID has been its effects on the overall supply chain throughout the world. Due to lockdowns, the mining, processing and delivery of raw materials like timber and steel have skyrocketed in price, increasing them by 20%-50% across the board. Companies generally get paid upon completion of the project itself, therefore delays of materials from both head contractors and subcontractors, delay the project’s completion greatly.
Multiple construction projects coming up in combination with the lack of labour have been driving labour costs up dramatically over the last year. We have not had overseas visitors for two years while in lockdown, which has caused a further disparity between labour supply and labour demand. While speaking to construction companies every day, I am aware that everyone is feeling the lack of skilled and general labour available, which has been impacting the speed and the quality of the projects being delivered currently. The super and minimum wage increase at the start of July 1st further raises the cost of employment.
Generally being a very competitive market, the winner of the construction tender for subcontractor and head contractor is the one who has the best ratio of quality to cost proposed. This often leaves construction companies with a low percentage profit margin. Many volume builders rely on low margins but high quantities to deliver overall profit for the company. This usually works great as there is a high demand, but backfires when the cost of materials and labour rises suddenly. Around 50% of construction companies are currently operating insolvably which leaves them with no room for errors.
With construction companies already having a smaller cash deposit due to two years impacted by the pandemic, labour and material costs going up, as well as going into already tight margins, it’s a perfect storm to contribute to the nationwide closures. A lot of closure has to do with bad contracts for the jobs signed at the start of the project. If a company committed to a fixed cost a few years ago not accounting for the sharp rise in materials and labour costs and your delays, it leaves you with a very slight chance of making any profit on that project. Construction will of course continue, and contracts not delivered will be passed on to other companies, but it’s sure to take a few more casualties before the market settles again.