West Australian business FIRM Construction has fallen into administration in yet another blow for the embattled construction industry.
Director Mark O’Gorman said the business had been doing everything it could but failed to pull through the financial challenges of 2022.
The industry is facing major problems from a steep rise in costs to labour and material shortages that have slashed profits on existing fixed-price contracts.
“We have been closely engaged with the Department of Finance in the past few weeks to ensure our approach is aligned in terms of how best to deliver on our public sector projects, and we hope that process will continue while we are taking steps to restructure the company,” he said via WA Today.
“It is unfortunate that five projects awarded by the State Government between 1 July 2021 and May 2022 did not qualify for any financial relief for the significant cost escalations they incurred.”
Mr O’Gorman said administrators will attempt to restructure the business, which was turning over nearly $100 million per annum just two years ago.
“Paying our staff and sub-contractors while continuing to deliver the projects we have committed to has been our focus and priority,” he said.
“We have ensured most of our sub-contractors are protected by the use of Project Bank Accounts – on both our public and private sector projects.”
FIRM Construction, which has been in operation for 20 years, has an $80 million portfolio of properties mid-construction across Perth.
It was stripped of the contract to build a school earlier this week over fears it would not be ready for the 2023 school year, for which subcontractors are reported to be owed hundreds of thousands of dollars.
It has completed projects worth around $500 million for the WA Government since 2010.
The Reserve Bank of Australia has warned more insolvencies are likely in the residential construction industry as builders struggle with rising costs.
Some large firms have already entered into insolvency over the past year including Probuild, Condev Construction, Pivotal Homes, Waterford Homes, New Sensation Homes, Privium, Home Innovation Builders and Pindan Group.
“Overall, construction company insolvencies have increased sharply, exceeding their pre-pandemic levels and accounting for close to 30 per cent of all company insolvencies,” the RBA said in its twice-yearly financial stability review.
“More recently, the increase in interest rates has begun to raise debt-servicing costs for many firms, adding to financial pressures.”
The RBA warned further increases in insolvencies were likely.
“While the direct implications for the financial system are limited because banks have very small exposures to builders, there is potential for financial stress to spread to other businesses within the broader construction industry and to some households,” the RBA said.
Builders usually offer housing contracts at a fixed price with plenty of lead time, but since the start of last year the cost of materials has gone up more than 20 per cent.
“As such, profit margins for existing fixed-price contracts have compressed substantially, and builders are now making losses on some contracts,” the RBA noted.
“Ongoing delays as a result of supply-chain disruptions, inclement weather and illness-related workers’ absences have resulted in further increases in costs and have delayed when payment milestones are reached.
“According to industry contacts in the Bank’s liaison program, construction delays for detached homes are currently around 12 weeks on average – and much longer than this in some instances.”