Rise and fall clauses in construction contracts are increasingly on the table as developers and builders team up to crunch the numbers to hold Australia’s shaky construction industry together.
But a significant risk remains from the industry’s most critical allies in the fight against the ‘profitless boom’.
“There is a risk that some of the important parties that keep construction work going – and I’m talking mainly banks and other financiers – won’t play along,” said Shane Garrett, chief economist at Master Builders Australia. .
speaking to The urban developer vSummit Residential ApartmentGarrett said the peak body is calling for the inclusion of up and down clauses to be “more widespread”.
“So when costs beyond the control of builders increase in an unforeseen way, it is expected that these costs will be passed on.
“And a reasonable and acceptable profit margin is effectively maintained and market viability and efficiency are not impeded.”
Garrett said governments, as “best practice customers,” should spearhead balancing risk scales based on construction costs through up-and-down clauses in their contracts. of construction.
“We think governments that are doing a lot of construction and infrastructure work should lead the way here,” he said.
“Be helpful and supportive to builders who are going through financial difficulties and show a little flexibility beyond the strict limits of contracts…ensuring that work is done fairly and in a way that the cost increases are shared. .”
But he added there was evidence that in some situations, if up and down clauses were implemented, there was a risk that “banks may just not play the ball”.
“And that’s a concern,” he said.
According to the latest Global Construction Report from BIS Oxford Economics, supply chain issues due to lockdowns in China and the Russian-Ukrainian conflict are expected to linger and continue to impact construction costs.
“The mismatch between supply and demand indicates that construction costs will remain high through 2023 … raising the risk of cost explosions as well as project delays and cancellations,” he said. .
Julian Sammut, chief operating officer of Sydney-based developer Sammut Group, said a broad collaborative approach was essential in the pressure cooker’s current circumstances.
“Everyone is basically in the same boat and everyone wants to ensure the same result,” he said.
“Rise and fall [clauses] is something we definitely considered.
“It’s really about working with your builder to make sure that at the end of the day they’re there and they can still finish the project.”
But Sammut said that in terms of development, “everything is a dynamic in motion at the moment”.
“It’s a constant turning circle. The contractors come and tell us that’s the price, we then go back to the financier and they say we have to lower the price, so we came back to the contractor but the price has changed and we have to go back and ask for more of funds.
He said construction cost estimates for Sammut’s first apartment tower development on the Gold Coast had skyrocketed, but he had worked with contractor Multiplex and “everyone was on the same length of ‘wave”.
“Within about three months, we saw an increase of at least 15-20% in the cost of construction.
“We ended up just north of the $100 million mark on construction and we felt it was below that.”
Desmier Nairn, director of construction finance at Brisbane-based Hutchinson Builders, said developers had become increasingly receptive to upside and downside provisions.
“We get a lot of sympathy for the rise and fall type layouts,” she said.
“But not on a general basis or on an entire construction contract, mainly because it is very difficult for financiers to finance a contract of this nature.
“So we’re looking at a number of different things…we can cap an amount and beyond that it’s a price increase or we have a rise and fall [provision] on specific items.
“I think in this market, I would expect most developers to want to sign up with a builder who will be there at the end of the project.
“We’ve seen a couple of high-profile collapses…and I think everyone knows that if your builder goes down, and you have to bring in another builder, no matter what your cost, it’s going to be at least three times that.”
Nairn said it was “a truly unprecedented time for construction” and the profitless boom was a reality.
“The escalation across all market sectors has just moved so rapidly over the past six months…we have real supply chain issues.
“At this time Hutchies cannot quote for more than 30 or 40 days or so due to this market volatility, so we are very selectively reviewing the work we undertake.
“If someone came to ask us to bid and there were other builders on the list, we would probably pass up that opportunity because bidding costs are high…and in this market we have to select jobs that we think are more likely to come and go in a short period of time.
She said that over the past decade there had been “a transfer of risk to the builder in construction contracts, but there was no increase in margin to reflect this reallocation of risk. “.
“So you already start with a small margin to start with.
“Then with unexpected events like Covid, floods and war in Ukraine, there is no contingency. So you end up with a job that is either profitable or loss-making.
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