All Risk No Reward

The Australian Constructors Association is the only representative body for contractors delivering vertical and horizontal construction projects, as well as undertaking infrastructure asset management. Our members construct and service the majority of major infrastructure projects built in Australia every year. Our goal is to create a more sustainable construction industry.

Building firms are entering administration at more than twice the rate of other industries. This reflects some deeply troubling financial conditions. Profit margins have fallen to 1% and liquidity to 5%. Over half of all large builders now meet a technical definition of insolvency.

Why is Australia’s building sector so dysfunctional? Because the rules of the game are fundamentally unfair and drive builders broke.

Healthy markets need two things to function properly: (1) that the buyer knows exactly what they want, and (2) that the seller knows exactly how much it costs to produce. Under these conditions, the normal rules of commerce work well. Buyers specify their requirements upfront and sellers put a hard price on them.

The typical vehicle is the ‘fixed price contract’ and it works well for buying a fleet of cars or an office lease. This model does not work well for transactions with high uncertainty—say, a building project. It fails because the fixed price contract transfers all the uncertainty in cost and design onto the seller. When those risks are realised, they are funded out of profits.