What is Happening in the Building and Construction Industry?

The building and construction industry is facing a significant increase in insolvencies, raising concerns among industry professionals. As of 25 August 2024, the Australian Securities and Investments Commission (ASIC) reported 2,162 insolvency cases since 30 June 2024, reflecting a 22% increase from the previous year. While insolvency appointments in the building and construction sector have decreased compared to the same period last year, they are expected to surge later in the year due to the growing number of Small Business Restructuring (SBR) cases.

ASIC Australian Insolvency Statistics, Chart 1.2: The first time a company enters external administration or has a controller appointed – Industry type (Released 9 September 2024)

Unpacking the Causes of Insolvency

Insolvencies in construction often result from a mix of factors including fixed-price contracts, failures in quoting, and difficulties in recovering costs. The post-COVID environment has made things worse, with rising material and labour costs putting extra strain on already thin profit margins. Many companies have overextended themselves beyond the capacity of management and internal personnel, creating cash flow problems.

Residential home builders in particular have been affected by supply chain disruptions that began during the pandemic. Limited access to essential building materials, combined with higher costs, has caused delays in completing projects, further straining finances. These challenges increase the risk of insolvent trading, where companies continue to take on new debts even when they can’t pay their current obligations.

Directors’ Duties

Directors are obligated under Section 588G of the Corporations Act 2001 (Cth) to prevent insolvent trading and to act in the best interests of their company and its creditors. Failure to do so can result in personal liability for debts incurred during insolvency.

Mitigating Insolvency

1. Monitoring Financial Position: Directors must be proactive in monitoring their company’s financial health. Regular reviews of cash flow, profitability, and financial obligations are crucial for early detection of potential insolvency issues.
2. Seeking Professional Advice: When red flags arise, seeking professional advice is essential. Registered liquidators, such as David Levi, are experienced in assessing financial situations and devising strategies to navigate financial challenges.

Strategic Actions for Builders and Suppliers

Builders – 3 steps to success

• Work with experienced accountants: Skilled financial oversight is key. Regular reviews of cash flow and profitability are critical to avoid getting caught off guard by financial issues.
• Renegotiate contracts: Where possible, negotiate more flexible contract terms to allow adjustments for cost fluctuations. Avoid fixed-price contracts during times of economic volatility.
• Seek professional advice early: Don’t wait for problems to worsen. Engaging restructuring or insolvency professionals early can help you explore legal and financial options like SBR or safe harbour provisions.

Suppliers – 3 steps to protection

• Assess client risk: Before extending credit, carefully evaluate the financial health of builder clients. Monitor credit risk to anticipate potential insolvencies.
• Negotiate better payment terms: Shorten payment cycles or secure personal guarantees to reduce the risk of becoming an unsecured creditor if a builder becomes insolvent.
• Consult experts: Professional advice on how to manage risk and structure your business dealings can help safeguard your business against client insolvencies.

Support from Levi Consulting

Levi Consulting offers expert support in business recovery, corporate turnaround, restructuring, and insolvency. With a wealth of experience in assisting builders and suppliers, particularly in states like NSW, VIC, QLD, and TAS, Levi Consulting is well-equipped to help businesses across Australia navigate these difficulties.

David Levi, a registered liquidator and member of key professional associations like the Australian Restructuring Insolvency & Turnaround Association (ARITA) and the Turnaround Management Association Australia (TMA Australia), is available for consultation. For personalised advice and a path forward, contact David Levi at 0418 602 466 for a free chat or Zoom session.