Why Queensland builders should review their QBCC financial position before 30 June

As the end of another financial year approaches, businesses in all sectors are turning their attention to year-end reporting and reviewing their financial position ahead of 30 June.

For many Queensland builders though, this period is also an important opportunity to review whether their financial position still supports their Queensland Building and Construction Commission (QBCC) licence requirements under the Minimum Financial Requirements (MFR) reporting framework.

While the MFR system has been in place for many years, builders often still leave balance sheet reviews too late and miss the opportunity to use their 30 June financials for both annual reporting and MFR reporting purposes.

This creates unnecessary cost and administration, while leaving businesses under pressure to meet deadlines where failing to do so can result in licence suspension and projects grinding to a halt.

Understanding the QBCC MFR framework

Under the QBCC’s MFR regime, a builder’s allowable annual turnover is tied directly to the strength of their balance sheet.

When lodging an MFR report, businesses are required to demonstrate:

• a minimum net tangible asset position
• a current ratio of at least 1:1, meaning current assets must at least equal current liabilities.

To put it simply, the QBCC wants to see that current assets are at least equal to current liabilities, and that the business has enough tangible financial backing to support the volume of work being undertaken. The stronger the balance sheet, the higher the maximum revenue threshold the business may be allowed to operate under.

This framework was originally put in place to reduce the risk of construction businesses taking on work beyond their financial capacity – which is particularly understandable given insolvency levels in the construction sector are consistently among the highest of any industry in Australia. According to ASIC data, thousands of construction companies enter insolvency annually.

The reason for these insolvencies is not difficult to understand. Construction remains a high revenue, low margin industry where businesses can generate substantial turnover while operating on relatively thin profit margins.

Why builders can run into MFR issues

During the year, it’s not uncommon for builders to continue winning projects which leads to an increase in turnover. However, if their annual revenue ends up exceeding the allowable maximum revenue threshold tied to the most recently submitted MFR report by more than 10%, another MFR report will need to be lodged with the QBCC.

That updated report must demonstrate that the business has sufficient net tangible assets and liquidity to support the higher level of turnover.

Similarly, depending on the licence category, if the business’s net tangible asset position falls by 20% or 30% (from its previously stated level), this can also trigger the need for another MFR submission.

This can occur for several reasons, such as:

• bad debts or write-offs
• projects running over budget
• cash flow pressure
• unpaid invoices
• loans between related entities
• increased liabilities.

Business owners may not realise there is an issue until after 30 June, at which point the chance to make appropriate balance sheet adjustments has passed.

Why the lead up to 30 June is important

In addition to reducing cost and administration by aligning EOFY reporting with any required MFR submissions, builders who act before 30 June may still have time to implement balance sheet strategies that improve their financial position for MFR purposes.

Depending on the circumstances, this may involve:

• repaying related party loans
• issuing new shares to inject equity
• putting deeds of covenant or deeds of cross guarantee in place
• reviewing related entity loans and asset treatment within group structures
• strengthening balance sheet and current ratio positions.

For example, where a business relies on financial support from elsewhere within a corporate group, supporting legal arrangements may need to be implemented before 30 June for those positions to assist with MFR reporting purposes. Otherwise, businesses might face additional reporting requirements later in the year.

Likewise, businesses can run into issues where funds have been both lent to and borrowed from related entities. This results in the liability being recognised while the asset is potentially excluded from the net tangible asset calculation – creating pressure on both the net tangible asset position and current ratio.

The value of acting early

Most issues associated with MFR planning are significantly easier to manage proactively rather than retrospectively.

Once 30 June passes, businesses may lose the opportunity to make simpler balance sheet adjustments within their EOFY financial statements and could instead require additional out-of-cycle financial reporting later in the year to support an updated MFR submission. This can also increase the risk of regulatory action if the QBCC identifies that maximum revenue thresholds have been exceeded or minimum financial requirements are no longer being met.

If this results in licence suspension then the reality is that projects will be forced to stop, subcontractor relationships will be affected, and the business may face substantial financial losses while the issues are resolved.

The good news is that many MFR issues can often be managed with proactive planning ahead of 30 June. Rather than waiting until EOFY accounts are underway, businesses should consider engaging with their accountant early to review whether their financial position still aligns with their MFR requirements and projected turnover.

If issues are identified early enough, there may still be time to assess the business holistically and implement appropriate balance sheet strategies before year-end.

For help assessing your construction business’s financial position and MFR requirements before EOFY, contact the business advisory team in RSM’s Brisbane office.