A construction report, drawn by the Australian Constructors Association (ACA), has revealed poor health in the building industry and the need for urgent action.

ACA chief executive officer Jon Davies says the message is clear that the industry is in deep trouble and the government must act now to stop the contagion and create a more sustainable industry able to build the housing and infrastructure the nation requires.

“The building industry is a textbook example of market failure. The basic lesson is simple, fixed-price contracts work well when the buyer knows exactly what they want, and the seller knows exactly how much it costs to produce. That market is not construction.

“In the building industry, all the uncertainty and risks are the responsibility of the contractor and, when those risks are realised, they are funded out of the contractor’s already razor-thin profits. The practice of transferring all the risks to contractors under fixed-price contracts has led to a deeply unstable industry.”

He adds that no contract can account for all the unexpected events that will complicate a building project as it unfolds, but it can incorporate mechanisms to encourage the client and contractor to resolve them fairly and reasonably.

Building firms are entering administration at a rate higher than double of other industries. The profit margins of the building sector have dropped from around 3% to below 1% and liquidity has plummeted from 15% to below 5% according to the ACA. Most notably, more than half of all large builders are now carrying current liabilities more than current assets, a technical definition of insolvency.

The ACA’s latest report, All risk, no reward, proposes government clients lead the way by committing to new rules of engagement.

The new guidelines recommend that building contracts become less transactional and involve the builder at the earliest opportunity to ensure an accurate price can be determined. This is to the benefit of not only the contractor but also the client who can be confident the builder will survive the delivery of their project.

“Changing current practices will create the conditions for improved productivity and a healthier industry,” Jon says.

“A profitable construction industry is in everyone’s interests and should be a key priority for all governments.”