The financial difficulties facing the Australian property and construction sector in recent years have sent shockwaves across the country. From company directors, to construction workers, suppliers, sub-contractors, and of course aspiring residential homeowners - many people have felt the impact.
There are promising signs though, with a sharp slowdown in the pace of construction cost growth perhaps signaling that pressures are stabilising within the building sector.
We spoke to Mitch Herrett, Brisbane-based Partner, RSM Restructuring and Recovery, about his predictions for the Australian construction industry. Is the worst now over? Or is there more pain to come?
Q: What is the construction outlook for the Australian construction sector?
A: We're going to see another tough, and very telling, six-to-12 months in the construction industry in Australia. I predict there is more pain to be felt, before the construction industry stabilises again.
The economy keeps growing, our population is increasing - construction will of course continue to happen; but the way construction projects are managed, and which companies are solvent and able to deliver the projects, will keep evolving.
Q: What are some of the biggest issues facing the construction industry in Australia?
A: The operating margins of larger construction companies, and even smaller ‘mums and dads’ building businesses’, tend to be fairly thin.
The risk level of projects and their scale varies significantly, but it’s common for construction projects to have significant overheads and variations. Construction companies typically have to incur significant debts in advance of receiving payments from their customers, and that can cause financial stress.
It’s a competitive market space too, and sometimes people will undercut someone else just to win the job in order to drive some short-term cash flow. They may then plan to make up for the reduced profit margin of that project, on the next job.
Throw in the global pandemic with construction sites being locked down, labour shortages, supply chain challenges, extreme weather events, defect issues, and the general rapidly increasing cost of living pressures - those profit margins that may have been thin, have now potentially become a loss.
It’s particularly challenging for builders with fixed-price contracts as they aren’t allowed to pass on price increases to homeowners.
Q: Do you think there are a lot of construction companies ‘just hanging in there?’
A: There are going to be a number of big and small building companies that are continuing to win and deliver on projects, but they would also be carrying significant debts from prior projects due to the COVID-19 lockdown periods and extreme weather events in Qld. New projects drive cash flow to pay employees, suppliers and the Australian Taxation Office, but unfortunately, a stagnant or growing pool of debt and creditors may be their reality - despite them continuing to deliver on projects.
This challenge is not unique to the construction industry, we see it across a vast number of sectors; business owners or directors trying to decide whether to deal with the financial difficulties now, or later down the track.
They are often asking themselves: Can I turn this business around and make it more profitable? Or do I need to try and sell the business and pay off the debts? Will I lose my building license? Or even, ‘Will I go to jail?’
While we know it can be a tough call to make, we always encourage people to seek professional advice sooner rather than later as it usually means they will have more options to consider. Plus, we know it can be incredibly stressful carrying that type of financial worry and uncertainty alone.
Q: You’re based in Brisbane Mitch. Tell us a bit about Queensland construction project trust accounts.
A: This Queensland, state-based legislation has been introduced essentially to help protect construction sub-contractors from insolvency events. It’s designed to give them protection by requiring their money to be paid into a trust account, so that they will get paid on time for work that’s delivered.
There are some challenges between the interaction of insolvency law, and the newer project trust account legislation in Queensland as the two laws aren't really written to interact with each other.
For example, when we have a company that is a Trustee of a trust, the Liquidator and/or administrator doesn't have an automatic right to go and sell trust assets or distribute those trust assets without a Court order because the Corporations Act does not actually give you the rights to do it.
The financial protection of sub-contractors is a very positive thing, but more ‘ironing out’ of the practicalities with the trust account legislation would be beneficial.
Q: What are some positive solutions that you think will help the construction industry in Australia thrive in the future?
A: Based upon my restructuring and insolvency experience, I see innovative quoting using AI, realistic cost plus margin agreements, and cost control & efficiency mechanisms systems, as being opportunities to better safeguard the sector.
I’d also like to see a more collaborative approach to legislation, including more options for construction companies who may want to enter the voluntary administration process to allow them to trade out of financial difficulties.
Currently, if the construction company is insolvent, there is no way to formally restructure the Company whereby the Company can continue to trade and maintain its builders' license as happens in other industries. I would encourage the State Governments to consider amendments to the respective legislations that would enable this happen through a voluntary administration/Deed of Company Arrangement to allow them to actually finish projects, recapitalise or do negotiations, which would be beneficial to all stakeholders.
Q: When should people seek advice if they are worried about the financial viability of a small or large business?
A: The earlier, the better. Ask questions, seek advice. It’s often a little bit ‘the Australian way’ to try and fix things alone, but from my experience little problems can become much bigger ones if you don’t seek expert advice when concerns first arise.
If you are solvent, there may be restructure options, other ways to generate profit or reduce your outgoings. Contract negotiations, and preferred supplier discussions - it’s about being proactive and strategic and getting the help you need at the right time. There is certainly no shame in that.
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If you or anyone you know needs mental health support:
- Lifeline on 13 11 14
- Beyond Blue on 1300 224 636
- Headspace on 1800 650 890
- MensLine Australia on 1300 789 978
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If you would like to learn more about the topics discussed in this article, please contact your local RSM office.