Victoria’s big infrastructure build is having the unintended consequence of significantly increasing the cost of material and labour and is threatening to bring down our home building sector.
I bumped into an old mate on the weekend as our kids battled against each other in a Basketball tournament. He works for a big builder and in a lull in our respective gushing over our kids I asked him how work was getting on.
”It’s bloody tough out there” he replied. This surprised me a little as I have, in recent months, seen a massive spike in loan applications for developments.
“There are a few builders going under at the moment!” he said as a matter of factly.
The reason given? Builders are having terrible trouble sourcing raw materials and the cost of these materials is going through the roof.
It turns out that this “big build” that is happening in Melbourne is having an unintended consequence. The lure of government money is attracting labour and building materials on a huge scale. This demand has pushed prices through the roof. Builders doing projects on fixed price contracts are getting caught and its putting massive strain on their finances and eating project margins.
Concrete is an example of the problems faced. Supposedly we are running out of sand! Go figure!
What does it mean from a banking context?
1) Builders need to be pricing material and labour cost increases into projects. This might render them non competitive and that’s of course the normal challenge.
2) Developers need to do extra checks when selecting builders. Check other projects of the builder are under control. It would be worth ringing subbies and material providers of your builder to make sure your builder is paying everyone on time. Late payments can be a good early warning sign!
Credit managers in the banks are very aware of the challenges faced. This is why it’s so hard to get them excited about building projects currently.
Dear Victorian Govenment – are you aware of the strain you are putting on Small Business by saving up all your infrastructure projects and doing them all at once just before an election?