The second wave of construction insolvencies is coming

Australia’s already besieged construction industry may be heading into a second wave of insolvencies.

The first wave was driven by the dramatic increase in construction costs that followed the pandemic, with builders caught between fixed-price contracts and rapidly escalating labour and material bills.

This time the warning signs are buried in the contracts already sitting in builders’ books.

Build Metric says the second wave revolves around builders who are still signing fixed-price contracts based on estimates that fail to account for what materials, labour and fuel will cost when the job is actually delivered.

The problem, the construction estimating and quantity surveying firm points out, is that many of those mistakes do not become obvious at tender. They become obvious six, nine or 12 months later, when the builder is deep into the project and discovers there is simply not enough margin left to finish it.

Construction firms accounted for 24.5 per cent of all Australian insolvencies in the latest ASIC Series 1 data, with 3,472 first-time insolvency events recorded compared with 3,596 the previous year.

That represents an enormous number in an industry that is supposed to be ramping up production to address Australia’s housing shortage.

Luke Rose, managing director of Build Metric, said the distinction between a sound tender and an underpriced job was becoming increasingly important.

“The market has been brutal, but the builders who are surviving it priced it properly at tender,” Mr Rose said.

“We see the difference every day in the briefs that come to us. A builder-prepared estimate on a $2 million job that doesn’t include a steel or copper escalation clause, doesn’t have current plumbing supplier pricing, and uses last year’s diesel rates is not a price. It is a guess.”

The numbers behind that warning are difficult to dismiss.

According to Build Metric, 63 per cent of Master Builders Victoria members are locked into fixed-price contracts that prevent them from passing on increases in material and fuel costs.

Typical residential builder margins are around 5 to 10 per cent, leaving very little room for error when input prices move sharply.

Those input prices are, indeed, moving.

Steel duties on Chinese hot-rolled coil reached as high as 82 per cent, while rebar duties increased to 23.7 per cent in May.

Iplex notified customers of increases of 27 per cent on PVC, 36 per cent on polyethylene and 31 per cent on polypropylene from April.

Structural timber was up 8.29 per cent year-to-date through the June quarter, while diesel jumped 41 per cent in March alone.

These are not the sort of annual increases that can be comfortably absorbed inside a builder’s margin and some occurred within just a single quarter.

The tender can already be wrong

The more worrying issue for builders is timing.

Build Metric says one of the most common errors it is finding is builders submitting fixed-price tenders using today’s costs for projects that will not commence for another six to 12 months.

RLB is forecasting tender price growth during 2026 of 4 per cent in Sydney and Melbourne, 5 per cent in Brisbane, 5.5 per cent on the Gold Coast, 5.3 per cent in Perth, 5.1 per cent in Adelaide and as high as 6 per cent in Townsville.

RLB also estimates total construction work nationally has reached a record $324.8 billion, with data centre commencements alone jumping 208 per cent in 2025.

The pressure is therefore coming from both sides.

Builders are competing for labour and materials in an extraordinarily busy construction market, while trying to deliver work that may have been priced months earlier.

On a $2 million project, a five per cent annual escalation amounts to another $100,000 if costs rise over a 12-month delivery period.

That is potentially the difference between a job producing a modest profit and producing a substantial loss.

Mr Rose said the solution was not difficult to foresee.

“The escalation question is not complicated, but it gets skipped,” he said.

“A builder working off their own estimate prices what a job costs today. They are not necessarily thinking about what the same labour and materials will cost at month eight or month ten of the project.”

Build Metric says it builds escalation allowances into its estimates using the relevant RLB index, arguing this provides a more realistic assessment of what a project will actually cost to deliver.

Housing demand remains strong

The extraordinary part of the situation is that Australia still desperately needs more homes.

KPMG urban economist Terry Rawnsley said recent building data showed housing commencements had increased to 52,201 dwellings in the June quarter, up from 48,804 in the previous quarter.

House commencements surged 12 per cent to 31,707, while townhouse and apartment commencements remained around 19,000.

Completions also increased 5.8 per cent to 47,186 dwellings.

On the surface, that sounds encouraging but the problem centres on what happens next.

Mr Rawnsley said activity was probably at or near the peak of the current construction cycle.

“Activity remains very strong, but it will be difficult to push commencements materially higher while feasibility pressures, labour constraints and financing costs remain elevated,” he said.

The number of approved dwellings that had not yet commenced construction had fallen to 30,242 in the June quarter, close to a five-year low.

“The time for patience is over for developers,” Mr Rawnsley said.

“With prices softening and holding costs increasing, developers are likely seeking to complete projects as quickly as possible.”

Developers want projects moving, builders need to keep them moving and Australia desperately needs the homes, but the economics of delivering them are becoming increasingly difficult.

The pipeline is beginning to lose steam

Updated August approvals released by the Australian Bureau of Statistics (ABS) on Wednesday (7 October) provide another clue.

Total dwelling approvals fell 6.1 per cent to 16,953, with private-sector houses rising 3.7 per cent but private-sector dwellings excluding houses falling 21.2 per cent. The value of residential building fell 0.6 per cent to $11.3 billion.

Data released by the Housing Industry Association on Wednesday (7 October) showed that, based on new home commencements for the first two years of the Housing Accord, Australia is now 94,980 dwellings behind the target.

KPMG said approvals had remained relatively resilient over the past three quarters but warned that feasibility remained a major constraint.

Mr Rawnsley said Australia needed considerably more housing supply, but higher construction costs, financing pressures and market uncertainty were making it harder for some projects to proceed.

“The large number of dwellings currently under construction is encouraging but sustaining housing supply will require ongoing improvements in project feasibility and continued confidence from developers and investors.”

As well as hindering new home supply, a builder going under also leaves subcontractors unpaid, projects unfinished, clients waiting, lenders exposed and developers scrambling to find another builder at a time when replacement construction costs may be considerably higher.

The collapse of one company can therefore change the economics of the project sitting behind it.

Competing for limited workforce

Construction is also facing an unusual level of competition for labour.

The housing sector is competing with major infrastructure projects, the energy transition and the rapidly expanding data centre industry.

Property Council Group executive policy and advocacy Matthew Kandelaars said the construction industry was already struggling to reconcile Australia’s housing ambitions with the other projects competing for the same workforce.

“You cannot increase housing supply while simultaneously making investment harder and stretching the workforce needed to build it,” Mr Kandelaars said.

“If governments want more homes, they need more projects to stack up.”