Tier Classification of Builders

Calendar 2022 and 2023 has seen an unprecedented number of builders across Australia fail and go into external administration and liquidation, across all tiers, ranging from smaller, local home builders through to some national and international builders.

The main reason seems to be lack of financial strength and in some cases inefficient administration and reporting systems. It boils down to liquidity, financial resources, and administration & management systems.

The post-covid19 era cost escalations, initially in materials and material logistics, became magnified by escalations in the costs of trades and labour.

Several mid-tier building companies have reported difficulty in firstly securing trades, and secondly in fixing the trades quoted costs 3-6 months post tender price.

These ingredients become a recipe for disaster especially with fixed-price building contracts where there is no or limited ability for the developer to contribute further equity towards covering increased project costs that are mostly outside of the control of builders.

Builder collapses, some have been major, long established national names, have emphatically added yet another risk category to a project financier’s already robust risk matrix, where now more than ever more weight is placed on assessing Deliverability Risk.

Builder Risk or Deliverability Risk is concerned with the analysis of the contract builder, to assess its ability to successfully deliver the project to a satisfactory and certified completion especially in the face of increases in project costs and other unforeseen events.

As a developer, you will have heard your project financiers speak of your builder as a tier-3 builder or tier-2 builder, you may have heard your project financier declare, “we will only approve a tier 2 builder for a project of this size” and you may have wondered what determines the categorisation of builders in this way.

Our discussions with various industry professionals and project financiers reveal a contrast in views; some suggest a reference system has three tiers and others suggest four or five tiers; presently, there is no industry adopted benchmarking model to consistently categorise builders.

A simple view may resemble:

▪ Tier 1 – has the ability to complete the majority of works with its own employed professionals, trades, and equipment and has the financial resources to withstand project risk exposure and major procurement functions.

▪ Tier 2 – relies somewhat on subcontractors but employs key professionals and trades.

▪ Tier 3 – relies heavily on subcontractors and usually performs mainly project coordination and management employing key persons only.

Financial metrics and a comprehensive examination of administration & management systems are also important in determining the categorisation of the contract builder.

Stakeholders, including; landowners, investors, developers, financiers, and government authorities rely on builders to deliver reliable built for purpose facilities without material defects.

The more complex a project, the greater the risks in design, construction and workplace management and safety; not all risks can be fully managed away or mitigated.

Stakeholders need to make informed contracting decisions and project financiers need to assess project-appropriate builders; hence the need for a well-defined, industry-standardised tier system that can be consistently applied to help assess the capability, experience, and financial standing of builders in the market.

The NSW Building Commissioner has his own rating system that looks more at the quality of delivered product as well as site management and compliance with the building code. In the writer’s opinion, the Building Commissioner’s office is well placed to assess and categorise builders as part of contractor licencing, perhaps with annual reviews.

Queensland’s QBCC licenses builders for different size projects based on financial capacity.

Quantity Surveyors also perform a builder suitability assessment included in the pre- commencement report.

A first step in writing a credit memorandum for project finance, the writer searches ASIC registers, conducts Builder’s Licence checks, google / press articles, and other enquiries; the information compiled from these sources doesn’t always sync and some may be out-of-date.

My next step involves review builder’s financial information, detailed resume of completed projects, director and nominated supervisor CVs, corporate structure, management system, as well as WIP and forward cash flow, and enquiries with QSes on past projects. All of this information then forms an important and detailed section in my credit memorandum.

LINK’s detailed analysis and review is sufficient for some project financiers; others are following the emerging trend of outsourcing builder reviews to external, independent liquidation consultants who, in my opinion, are quick to draw negative conclusions to limit their liability.

Proposed 5-tier Matrix

With reference to the above table, a detailed review of contract builder should be based on Key factors:

▪ Capability and expertise including project size

▪ Project sector / type

▪ History

▪ Financial capacity and access to capital

▪ Company and management structure

▪ Reporting obligations, are they a private company, public company or a listed company?

▪ Systems and processes

▪ Geographical spread in area of operation

▪ turnover and the number of projects they undertake

After considering opinions and information gathered from various industry sources, it is proposed that the above tabled, five-tier matrix would be most appropriate to be put forward for adoption by our industry as a uniform starting point for the assessment of contract

builders.

Should the reader wish to comment or make further suggestions to enhance this proposal, please forward all correspondence to me at jpalouan@linkcm.com.au