Financial barriers in the residential building industry

HIA’s Position statement

1. It is HIA’s position that the current approach to financing in the residential building industry:
• Does not accurately reflect the financing and cash flow needs of a residential building project. 
• Places financial pressure on builders, which in some cases exacerbates trends towards insolvency.
2. The residential building contract, including the agreed progress payment schedule must be respected and adhered to by financial institutions and other third parties involved in approving payments. 
3. Financial institutions should not impose payment arrangements or apply a ‘one size fits all’ approach to payment arrangement. 
4. Homeowners must play a role in ensuring financial institutions adhere to the payment arrangements agreed to under the contract. 
5. HIA supports builders being able to customise payment arrangements, including setting out allocations for provisional amounts and the ability to recoup preliminary/preconstruction costs, to suit individual projects.
6. Contractual arrangements that support and promote flexibility and cash flow are in the best interests of all parties involved in residential building work. Such arrangements should include cost plus contracting.
7. HIA supports the residential building industry working with their clients and financial institutions to find practical ways for all parties to manage their risk, whether that be through insurance, bonds or other risk mitigation arrangements. 
8. To support cash flow, finance products should be tailored and available for small businesses. They are often expensive and difficult to obtain without the use of a substantial asset (the family home) as collateral.

Background

• Diminishing cashflow, reduced margins and the banking industry’s/homeowner’s insistence on prescribing progress payments in residential building contracts is placing increasing risk on residential builders. 
• The challenges the industry faced during Covid, with respect to significant price rises and material delays, has brought the risks associated with fixed price contracts and prescribed progress stages into even sharper focus. 
• Businesses operating in residential building industry are entering administration at more than twice the rate of other industries. 
• With all the complex regulatory and market change, residential builders are still commonly bound by fixed price contracts with the homeowner. Many of these risks cannot be known at the time of contracting and yet residential builders are expected to take on these risks for a diminishing return.
• Under current finance arrangements banks dictate progress payment arrangements and are essentially acting as a quasi-regulator. Not only is this inappropriate, but it is unnecessary as there are legislative protections for consumers in all jurisdictions (either through the regulator or through the relevant warranty insurance scheme) regarding the builder being unable to charge in advance of works completed on site. 
• Customised progress payment schedules and/or collaborative contracting practices allow the builder to adequately price and control the cashflow on the project and across their business. The effect of the banking industry insisting on standardised progress payment schedules means that the residential builder may be unnecessarily financing the project or being unfairly financially stretched between progress claims. 
• Within these constraints, HIA is seeking to highlight that the progress claims are the residential builder’s cashflow. If there are delays on site which leads to the residential builder being unable to invoice and receive payment, then this may have an alarming effect on payment of suppliers and subcontractors, and ultimately the solvency of the industry.

Policy endorsed by HIA National Policy Congress: 21 May 2015. Re-endorsed October 2020.