Trends in the construction sector

In this video, partners John O’Kane and Ben Cotter discuss the latest trends in the construction sector. Insolvency is creating a tough environment for builders and subcontractors resulting in more security of payment activity and an increased focus on solvency risk in construction contracts. They also discuss areas of increased work including health-related activity, such as aged care and hospital construction, and work in the renewable energy space.

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Transcript

John O’Kane and Ben Cotter

Insolvency is all around the place at the moment. It’s a very tough environment for builders in particular. They seem to be getting caught in the middle – rising prices, harsh contracts, fixed-price contracts, which just means that they’re getting stuck, and the number of subcontractors going under kind of means that there’s not enough subcontractors to go around for the bigger work. Plumbers, for example – there’s only two plumbing contractors of any size in Victoria left, because all the rest of them have gone.

What that means, there’s big flow-on effects from that. Your contractors need to be hardy, there’s more security of payment work with people putting in payment claims and trying to keep their cash flow going more than they otherwise would. So, we’re getting more claims and more security of payment work than we would have.

[Ben Cotter:] We’ve had a lot of work in the renewable energy space, particularly wind farms, and also just connecting renewable energy projects to the broader electricity network. There’s government targets and a bit more certainty in the area of what’s happening with our emissions reduction targets. There has been, you know, a bit more investment in that space and a bit more momentum in that space.

[John O’Kane:] Still seeing a lot of health-related work, so both aged care construction and also hospital construction. We’ve got an ageing population and the government is still pouring a lot of money into that area, so that filters down, and we’re acting for a number of clients who are doing that kind of work. The issues facing clients for the next few months will be the same as the ones for the last six months to a year, I think.

Insolvency is going to be driving the economy for the next 12 months. The residential in particular, there’s not a lot of healthy residential builders out there. Clients are really looking for us in our contracts to cover off that kind of risk by including clauses in there about the financial capabilities of contractors – that probably wouldn’t have been there a year ago – to include evidence in contracts or requiring evidence that subcontractors are being paid, including remittance advices.

[Ben Cotter:] On the horizon, I think it’ll be interesting to see what happens in your sort of traditional residential development space. We have a housing shortage. Prices should be going up, which should be enticing developers to undertake new projects, but then at the same time we have high interest rates, which are probably quelling purchase or demand for for their products. So, it’s going to be interesting to see how that plays out over the next six to 12 months.

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