Can developers fix their defective reputations?

We have written a lot in these pages about efforts by the NSW Building Commission to ensure defects in new apartment buildings are fixed, in part using the iCIRT star rating system to identify the best and worst players in the business.

In this article, Brad Walters, Head of Product and Rating Services at Equifax, the company behind the iCIRT ratings, asks whether exposing the harsh realities around defects has irreparably damaged the reputation of the construction industry

The past few years have been tough for builders and construction companies. Lockdowns, escalating costs of doing business and a tight labour market continue to substantially impact the industry. According to Equifax data, construction insolvencies have increased by 46% for the calendar year to date, compared to the same period last year.

This challenging scenario has also resulted in eroded trust. A consumer survey conducted by iCIRT^[1] noted that only three in ten (30%) Australians had a positive perception of the construction industry. Conversely, 68% of respondents said they are somewhat (28%) or very (40%) concerned about the rising number of construction company insolvencies and their potential impact on housing supply.

Thankfully it’s not all doom and gloom. The data also showed that over two-fifths (45%) of consumers intended to invest in property (i.e. to purchase, renovate, or build a home or investment property) in the next five years. And three quarters (76%) of this cohort are willing to pay a premium price to work with a trustworthy operator.

The opportunity is there for those in the industry ready to seize it – and more recent insights suggest things are heading in the right direction. This was the tone of the recent ‘Leading Change Across the Construction Industry’ event hosted by Equifax. Industry leaders shared relevant insights that may shine a light on the path forward, with NSW leading the way.

The program’s success suggests that independent ratings are a key part of the answer to the industry’s problems by empowering consumers to make more informed decisions, and newly released insights from iCIRT reinforce this concept. According to the iCIRT research, consumers in NSW are more likely to say their perception of the building industry stabilised or improved over the previous 12 months than any other state.

As consumers become empowered to make more informed decisions, the industry has been put on notice. The need to demonstrate trustworthy credentials through independent assessments has squeezed construction companies and professionals, weeding out those in the industry who are not operating in consumers’ best interests. Additionally, ratings programs have rewarded those doing the right thing, allowing them to differentiate themselves as highly reputable contractors with a competitive edge. In the view of NSW Building Commissioner David Chandler, the playing field has been levelled over the past five years.

Consumers have unquestionably been the beneficiaries of this change – but the rise of independent ratings is not just positive for consumers. It also delivers value from an investment perspective. In aggregated sales, the iCIRT-rated community represents more than half of the state’s residential building market. Currently, more than 450 individual constructors across NSW have obtained or are progressing with an iCIRT rating assessment, representing ~25% of the total number of medium and/or large NSW home, apartment and mixed-use builders or developers.

We’ve seen some incredible returns for rated companies. On average, for small builders able to protect their pricing, even at only a 1% differential (despite consumers being prepared to pay a premium of 7%), this delivers a profit payback of 6x the cost of the rating. For a medium builder, the profit payback is 15x the cost of the rating, assuming only a 1% pricing differential. The larger the business and the greater the pricing differential, the greater the payback.

Arguably, the emergence of market-led trust mechanisms providing robust rating assessments has been integral to collectively rebuilding consumer confidence in NSW. These programs have equipped consumers with the knowledge to easily identify building professionals with a proven track record. And provided businesses with better financial return.

The reforms in NSW are evidently working, and consumers are voting with their wallets. As Corey Nugent, Chief Executive at Resilience Insurance, revealed at the event, properties that have assurances like ratings and insurance are selling faster on the market and reporting sale prices tens of thousands of dollars higher.

For the construction industry, bolstered reputations and a healthier market are achievable. Independent ratings and trustworthy credentials have helped ensure that the small minority doing the wrong thing doesn’t impact the majority, and those embracing these trust mechanisms are playing a critical role in rebuilding confidence in a vital industry.

^[1] Research undertaken by YouGov Plc on behalf of iCIRT. Total sample size was 1008 Australian 18+ adults. Fieldwork was undertaken between 28th September – 2nd October 2023.