As the building industry is in crisis, some concerns proposed solutions overlook the fundamental flaws in the current business model. Merely focusing on financial management and introducing Project Trust Accounts fails to address the core issue: the unsustainable nature of the builders' livelihoods. Those offering solutions must understand the challenges of making a living in this industry. Rather than blaming individual builders and COVID-19 relayed issues, we must recognise and rectify the inherent flaws in the business model before implementing any meaningful solutions. It's time for a paradigm shift.
Jon Davies, CEO of Australian Constructors Association, said in an ABC interview, "Our industry has never been particularly strong at the best of times, and it suffers from very small profit margins."
For years, builders have operated within a flawed business model that severely limits their financial viability. With net profits rarely exceeding 1-3%, builders find themselves trapped in a cost-sensitive environment leaving little if any profits to build a war chest for the industry's challenges, further undermining their long-term sustainability.
Over the last five decades, builders have only just kept pace with the highs and lows of the building demands caused by recessions, credit squeezes, interest rates, the GFC and then came COVID-19.
This extreme cost sensitivity has led to a tipping point under COVID-19 supply issues, resulting in the industry's worst state that I've seen since participating across the sectors for over 50 years.
So why is the existing business model broken?
These underlying issues are not addressed by the implementation of Project Trust Accounts nor more robust financial reporting requirements that seem to be the only solutions on offer.
A FINDEX Accountants-sponsored Conference held in Brisbane recently gathered a panel of industry experts Nicola Lambie, Don Collins, Laura Hattin, Darryl Bird and myself to delve into the core challenges and potential solutions for the building industry. The focus was on embracing a simple-to-apply paradigm shift, considering the existing criticisms of stalled solutions like Project Trust Accounts at both State and Federal levels. An important insight emerged from the discussions: while debated for their effectiveness, Project Trust Accounts primarily target subcontractors and overlook approximately 90% of all contracts written, being those in the residential new home and renovation sector.
A snapshot of the conference can be viewed here:
How can a simple solution possibly address the complicated issues facing those working in the industry and those wanting work done in the industry?
It was encouraging that, at last, there is a respected voice at the government level with the vision of the simple solution voiced by David Chandler OAM in a recent Podcast;
David Chandler's market vision highlights that project owners' funds should not idle in builders' accounts. FINDEX Accountants demonstrated that relinquishing control of funds and focusing solely on construction delivery creates the much-needed paradigm shift, benefiting all parties involved.
The builder, acting as a construction manager (CM), focuses solely on project delivery under new construction management style contracts reflecting industry and project owners' needs in the domestic and commercial sectors. Instead of project trust accounts at the builder's level, project owners open a joint bank account where they have sole ownership. The CM simply becomes the second signature, allowing project funding to be preloaded without being deemed pre-payments. This provides transparency for all parties regarding services and costs, enabling direct payments from the account to relevant parties upon the CM's verification of contractual and performance requirements.
Secured payment flow to project parties ensuring project owners' funds stay on their project
This method is now at market and starting to make traction with project owners - builders - trades - suppliers, and critically could be the potential pushback solution to the concerns raised in a recent article by Michael Bleby https://www.linkedin.com/feed/update/urn:li:activity:7061984667259858944/
What, in a snapshot, what are the flow on benefits to the industry and its project owners?
The builders' adoption of construction management methods, wherein they relinquish control over all project funds and implement a joint security account between builders and project owners, presents a compelling solution. This solution marks a much-needed paradigm shift and should be seriously considered when discussing the industry's path towards viability. It specifically addresses the pressing issue of bridging the gap between the increasing demand for housing and the need for transparency, cost savings, and security across all types of projects.