Troubled times for the Construction Industry

The last 12 months has seen many large construction industry collapses, including commercial project builders (Probuild, Condev) as well as larger residential home builders (Oracle Building Corporation – handled by us here at RCIG, and Pivotal Homes).

However, smaller scale operators are increasingly feeling the pinch it seems, and our recent appointment as Liquidators to North Lakes based Pantha Homes Pty Ltd is just one example.

Small operators make up around 97% of the businesses involved in Australia’s construction sector, amounting to almost 400,000 individual businesses! These range from one person operators up to those employing up to 25 staff. As the political cliché goes, small business really is the engine room of the economy. However, the post pandemic build-up of stress factors impacting on them is leading to a steadily mounting toll.

The pressures facing construction businesses have been well documented elsewhere, but here is a quick summary of some of the key micro and macro factors we see impacting on the industry:

• disrupted supply chains,
• rising material costs,
• labour constraints,
• Blow out in average build times,
• inclement weather and related project delays,
• inflation generally,
• the rising interest rate environment,
• increasing insurance costs, and
• renewed debt recovery efforts from the Australian Taxation Office (ATO), including the use of Director Penalty Notices (DPNs) and the reporting of significant tax arrears to the credit reporting bureaus).

Some of the above compounding factors are leading to margin erosion for many small construction businesses. When faced with fixed price contracts and a wary client base often unwilling to meet additional outlays or extraordinary costs themselves, particularly when already concerned over building delays, a rapid spiral of decline can be faced by the troubled small operator.

The highly integrated nature of the construction industry exacerbates the problems. In other words, there is a cascading relationship between head contractors, sub-contractors, suppliers, and cascading down to the self-employed tradies or employees who you will see on building sites all over the country. A failure at any part of that cascading delivery chain can spread like a contagion to others up or down the supply channel. A small operator is particularly exposed and can risk having the rug pulled from under them, caused by the collapse of someone they are reliant on in their own supply chain.

With interest rates rising and banks tightening their lending requirements in preparation for troubled times ahead, the ability of small operators to access funding to get them through tight spots is also increasingly difficult. Worryingly, many smaller operators support their businesses through personal loans, often using assets like the family home as collateral. Current falling property prices are an added twist of the knife.

In addition, there is the looming concern over consequences of failure, given in Queensland under QBCC rules, an insolvency event will likely lead to the Director / Licensee becoming an “excluded individual” for 3 years. Similar rules also apply in other states. This can obviously be devastating when the construction industry is usually the core skill set and income source for these indivduals.

So clearly, the consequences of failure of a small operator really can be catastrophic for them personally, as well as for their home owner clients, and their staff and suppliers.

Is there any good news…?

On a more positive note, there is a number of factors to give cause for optimism for the sector…

There is certainly an elevated demand for building work across the country, given Australia has a well publicised housing shortfall. Renovations are going on everywhere and tradies can generally name their price to cashed up home owners wanting to get work done. The supply constraints are reportedly improving from their peak and (perhaps) the interest rate peak is approaching.

Clearly there are still many resilient operators out there in a strong financial position, with the capital and capability to weather the storm. Many industry resources (both private and government backed) are being touted to ensure prospective clients can do their own research and due diligence when selecting a construction industry operator before embark on their project.

Going forward…

Robson Cotter has much experience in assisting the small operator to navigate times of financial distress. We hold the appropriate licences, and have a range of expertise and qualifications to provide relevant and expert professional advice.

We are a small business ourself and pride ourselves on being approachable and easy to deal with and we will give straight talking, plain language advice.

If you are seeing warning signs in your own constructions or other business, feel free to call us for a no cost, no obligation chat. 

Bill Cotter, Director, p 07 3270 8500