The solutions to the building defect problem must be multipronged and address incentives and capacity, writes Andrea Sharam. And building code enforcement is essential to a properly functioning insurance system and to consumer rights.
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Detached housing construction has been flat for the past 45 years, and apartment development is highly dependent on speculative booms and a run up in prices. Apartment development trades off the potential for much more efficient construction against the risk of a downturn in the market.
And now we turn to defects and building regulation.
Defects are an inevitable outcome of incentives that prioritise cost and time over quality. The primary reason this can occur is that inadequate building code enforcement does not have countervailing pressure. Consumer law, domestic building contracts and presales contracts, and insurance requirements have also traditionally provided limited protection against defects. The result is a general lack of quality assurance culture. However, upon digging deeper, there are many contributory factors.
The lack of early design resolution is a source of defects. In the apartment sector, commonly used design and construct contracts explicitly reward timely delivery within a set budget. Often it also includes “without cost escalation” clauses. Low builder margins are another. Three per cent is not uncommon.
Builders then need to “value manage” to ensure costs can be contained. Such pressure is, in general, good, but the client needs to supervise the build to ensure quality is not compromised. That does not happen if the client lacks such commitment: many don’t. The focus on costs means dodgy builders undermine the good builders and put further pressure on margins, creating a vicious circle.
In detached housebuilding, domestic building contracts made to provide consumer protection lock in the price. However, when costs inflate beyond the contingency allowance, builders’ already low margins deteriorate. Cost cutting can be a matter of survival.
In addition to these pressures, booms create shortages of skilled labour. As labour costs inflate, workers without adequate skills enter the industry, contributing to poor work.
In detached housebuilding, the number of sites a supervisor needs to manage during booms blows out, causing inadequate oversight.
Consumer demand for customisation means unique designs and therefore less standardisation of trade tasks, increasing the likelihood tasks will not be completed properly.
The increasing specialisation of trades creates more “handovers” between trades, increasing the potential for defects. Low margins mean there is a lack of resources to invest in training. Busts see the permanent loss of some of the skilled workforce.
Building code enforcement is critical and essential for a properly functioning insurance system and consumer rights. The solutions to the defect problem must be multipronged and address incentives and capacity.
The size, profitability, and capacity of firms need to grow. Builders’ margins need to lift so that they have resources for training, supervision and capacity to invest in new systems and ways of working. Demand stability is a prerequisite. A stable market would permit builders to move away from sales-driven production to “rate-based” and therefore stable production so that process efficiency can be maximised. Extending legal liability for code compliance to designers, as has occurred in NSW, is another important step.
Code enforcement would likely lead to a shakeout of the industry. Builders with a poor track record would exit. This would reduce undercutting. Efficiency gains would increase margins. Increased profits and more secure cash flow would promote increased size and capability of firms, encouraging direct employment/tight alliancing.
Direct employment is important because extensive subcontracting delivers sub-optimal firm size that does not provide an institutional environment inducive to understanding the building code requirements. Tax incentives could encourage salaried trades over subcontracting.
These changes in turn would address the queueing problems.
The four research reports are available from AHURI.
The authors would like to acknowledge that this research was funded by the Australian Housing and Urban Research Institute.
