The human toll when builders go bust

Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. The construction industry is going through a really tough time right now after a surge in the cost of building materials, a worker shortage and rising rates sent firms across the country bust. The cascading effect is devastating as home dreams turn to nightmares and subcontractors are left without being paid. Today, Four Corners reporter Stephen Long on his investigation into the ailing sector and what could be done to fix it. Stephen, your story is one about a broken industry, about one of the toughest times the building sector in this country has ever faced.

Stephen Long: It certainly is one of the toughest times, if not the toughest time. Numerous people who’ve been in the industry for decades have said they’ve never seen it. Worse, with skyrocketing costs, difficulties getting supplies and labor, and companies going to the wall left, right, and center, leaving a trail of destruction behind them. It is pretty bad.

Sam Hawley: And you’ve spoken to some people who are right in the middle of that.

Stephen Long: Yeah, we spoke to a couple, Rahul and Puja, and they decided in March to lock in a builder for their dream home. This was going to be their forever home. And on the evening of the 29th of March, Rahul was sitting at his computer and he paid as much of the deposit as he could under his deposit limit because they wanted to lock in the price and get this all set. And that was with Porter Davis.

Rahul Madan: We paid $10,000 because our limit was $10,000 a day. And then the balance of $4,884 I paid on the 30th of March, which is Thursday at 6:45 p.m.

Stephen Long: Just hours later, his wife saw a social media post that was very unsettling.

Puja Suneja: I’m a part of the Facebook group Porter Davis customers. And there were posts there that they might go into liquidation.

Stephen Long: Seeing that post, they were first in disbelief and then in panic. And so Rahul sat down at his computer again and he fired off an email to Porter Davis.

Rahul Madan: I mentioned in the email ‘Is it true that you guys are going into liquidation?’ I mentioned in the email, I mentioned the word ‘scared’ that I’m very much scared. Is it true?

Stephen Long: Well, the next morning they found out, unfortunately, that liquidators had been brought in and had taken control of the Porter Davis group and Rahul and Puja were among the 1700 customers affected. Now, it was pretty bad because their deposit just seemed to go into the aether. They didn’t get a contract issued. And whereas a lot of people have received their money back, these deposits were meant to be held in trust and returned. Because theirs came so late in the piece, they just haven’t heard anything and they don’t even have the proper records. And so for them, it was a nightmare.

Puja Suneja: What they have done to us was not the right thing to do. They should have stopped like a month ago like they should have stopped taking the deposit. Now they have taken our deposit the night before when they are going into liquidation, we have not expected such a big builder living in Australia that this could happen to us. We trusted the whole process.

Sam Hawley: I think we can all imagine just how devastating that would be. And that moment when you realize that had happened would be just horrible. Let’s talk in a moment, Stephen, about why Porter Davis was still permitted to take funds from clients the night before they were due to collapse. Because that in itself seems extraordinary. It just doesn’t seem right. But first, the flow-on effect of this is huge, isn’t it? It’s not just people like Rahul and Puja, but all the subcontractors down the chain. They’re badly affected as well.

Stephen Long: Absolutely. And they are the people in these situations who are often hit the hardest because in the vast majority of liquidations, there’s either no money left for the little guys and it is a male-dominated industry.

They get either nothing or cents in the dollar, only a tiny fraction of what they’re owed, if anything at all. Porter Davis owed $147 million to creditors, $147 million. A lot of that was to subcontractors, cubbies who’d done work, and to suppliers, one of them being Sendi Chen. He is a chap who set up a business that’s making frames for houses out of light gauge steel. Now, Porter Davis was by far his biggest customer, about 70% of his work.

Sendi Chen: This is costing me $5,000 and all in this warehouse roughly cost me $400,000. And this is all for Porter Davis. We don’t know. What should we do? Where can I sell it? Who can I sell it?

Stephen Long: And he’d spent a big amount of money in his terms on materials for the pipeline of work that the building company had promised him. Porter Davis went under owing him close to $900,000. At least that was the amount acknowledged by the liquidator, he reckons in terms of receipts he hadn’t yet put in and weren’t accepted was more than a million. And that was money he just could not afford to lose.

Sendi Chen: That much-missed call on my mobile phone. My family, they are just calling me, asking are you all right?

Sam Hawley: And he didn’t have insurance?

Stephen Long: He had no insurance. He owes money and he’s getting constant demands for that money from his supplier. So he’s in a really bad situation.

Sendi Chen: When I answer the phone I don’t know how should I tell him. Because I don’t have that much money to pay him. And the question they ask is just the same question. When you are going to pay me? I don’t want to close down.

Sam Hawley: Yeah. And Stephen, there would be so many people like him in that position. Subcontractors, not just relating to Porter Davis, of course, but there’s been building companies collapsing all over the country. It’s a really difficult time.

Stephen Long: So if you look at the number of building company collapses, which is upwards of 1700 now, and you think of the number of subcontractors who would have done work, you’re possibly talking tens of thousands of people who are affected.

Sam Hawley: So, so, so many. And you spoke to John Murray. He’s a veteran of this industry. And I tell you, he’s not happy, is he?

Stephen Long: John Murray is a remarkable man. He is so passionate. He spent 45 years in one way or another around the building industry. For many years he ran the Master Builders Association, the peak body and lobby group for the builders. And he just loves the industry. He’s passionate about it, but he thinks it has a broken business model.

John Murray: In an industry that operates on a margin of 2%, particularly in current circumstances where we have inflation of 7%, where we’ve got significant shortages of labor, where we’ve had building materials like steel and timber rising 20, 30% to have a margin of 2% is a recipe for an industry that lives on the edge of viability. Builders that operate on that sort of margin get tipped over into insolvency very quickly.

Sam Hawley: So, Stephen, this does sound like a broken system. Let’s just return to that question briefly as to why it is that building companies like Porter Davis can continue trading, taking clients’ money, even though it’s clear they’re about to go under.

Stephen Long: Well, it’s a big question with Porter Davis, because the liquidators said that for about a month before they went under, since February, they went under in March, they had likely been insolvent. The directors have possible defenses against insolvent trading, which is an offense because they were working to try to get an investor into the business and working on various remedies.

And one of the concerns is you had this business desperately chasing more and more work to pay the bills and that isn’t unusual, in a sense that is how this business works right across the board. And they’re relying on new business coming in to pay bills that are accruing. It’s not good.

Sam Hawley: No. So the question is, how can this broken industry be fixed? Because surely we can’t leave it as it is.

Stephen Long: John Murray thinks he has an answer and he’s spending a lot of his time, and John Murray’s past 70, he pretty much got a full-time job now lobbying for the scheme that he wants to put in place. He wrote a report for parliament back in 2017, which was advocating a system where there’d be a series of cascading trusts so builders would be required by law to hold money in trust for cubbies they owed money to.

When a company went into liquidation under John Murray’s scheme, the banks wouldn’t have first access to the money. The secured creditors wouldn’t have first access to the money, the money that was meant to be held in trust for the cubbies that would be top of the queue.

John Murray: The trust fund model that I propose will ensure that the subcontractors who carry out the work will be appropriately protected.

Stephen Long: This is formally Labor Party policy. It’s in their policy platform, but the government is equivocating on it. They haven’t given any guarantees, but a lot are pushing back because building companies are used to using that money as their cash flow and borrowing against it.

John Murray: It’s not their money, it’s the subcontractor’s money. It’s the subcontractors that have done the work. They should be paid for the work that they have done. And it is improper for builders to use other people’s money. It’s unethical, it’s improper. It’s immoral.

Sam Hawley: What about the homeowners, though? The people who’ve been left high and dry halfway through a contract, halfway through a build like Rahul and Puja. What happens to them?

Stephen Long: Well, this does nothing for them. And so they’re in a bad position. They don’t know if they can continue with their dream or whether they’re going to have to sell and cut their losses.

Rahul Madan: Honestly, I don’t want to sell. This is my dream. Whatever it will take me to keep the dream alive, I will do it. But I don’t know whether I can fulfill that or not.

Sam Hawley: And what about Sendi Chen? You know, the cubbies? What about them now when there’s not a different system in place?

Stephen Long: Well, Sendi is in a terrible position. While we were with him, he went to the bank to see if he could get a business loan. And the bank looked at his records and said, well, they’re impeccable, you’ve always paid bills on time. But we noticed that most of your work was with Porter Davis. So how can we give you a loan? And he came out very, very upset, walked round the corner, took us to his home, and told us he was now looking like he was going to have to sell his house to pay his bills and keep his business going.

Sendi Chen: I don’t I just don’t want to think about it. It’s just horrible. It’s horrible.

Sam Hawley: Stephen Long is a reporter with Four Corners. You can catch his report tonight on ABC TV at 8.30 or on iView. If you want to know more about why so many builders are going bust, we covered that on May 30th and that’s in your feed. This episode was produced by Veronica Apap, Flint, Duxfield, Anna John, and Sam Dunn, who also did the mix. Our supervising producer is David Coady. I’m Sam Hawley. To get in touch with the team, please email us at [email protected]. Thanks for listening.