[+] Tradie Exodus: Construction Sector Apocalypse Looms

The apocalypse is now for Australia’s builders and subcontractors. And with the nation’s construction frontline entering a new danger zone that will likely render more balance sheets unable to buffer the prevailing perfect storm, the industry is bracing for more dark days ahead. Insolvencies across the embattled sector are on track to hit their highest level in a decade over the coming months and nobody can say for sure that the seemingly endless tide of company collapses won’t keep rising. “Squeezed” building contractors and subcontractors continue to make up the majoirty of casualties as the pressure from a plethora of crippling challenges is pushed down from the top of the construction chain. “It's an apocalypse for them because they're right at the front of the supply chain issues, labour supply issues and massive fluctuations in the price and availability of raw materials,” says construction lawyer and Helix Legal director Jacqui Doyle. “You can tender one day and then three months later, you know, you've got an escalation of 3 per cent or 4 per cent. It's hard to wear that when you sit at the bottom of the chain and your contracts aren’t allowing you to pass it up. “But I think everyone's feeling the same pain,” Doyle says. ▲ Construction lawyer Jacqui Doyle says the contractors wedged between subcontractors and fixed price contracts face an uphill battle in the current construction landscape. Despite a rise in total revenues of about 10 per cent, the combined profits of Australia’s 12 largest private construction firms plunged more than 50 per cent in the 12 months to December 2022. Of these companies, 10 recorded falls in profits—some of them diving 80 per cent or more—driven by escalating costs, labour shortfalls and wafer-thin margins. “The big players at the top of the tree at that head contractor level, the pressure is on them … that price pressure, the supply and demand pressure,” Doyle says. “They’re feeling the crunch of what’s going on in the market and … that’s filtering all the way down the contractual chain. “Certainly, if you're the meat in the sandwich at the contractor level, you're probably feeling it at both ends. “If you're stuck in a non-collaborative or non-risk sharing contract and then you've got subcontractors on the other end who won't contract with you unless their labour shortage and supply issues are dealt with in their contracts, that puts you in a very precarious position. “That's why I think we're seeing some of these larger, more substantial builders going into insolvency.” And Doyle concedes the foreseeable future is looking “a bit grim”. “I don’t think anyone sees any of this ending anytime soon. “To solve it, there needs to be a seismic shift in how we do business and how we build projects. The old model is broken.” We have a cashflow problem Chamberlains Law Firm director Michael Terry-Whitall says although a recent landmark court victory in a case brought by insolvency specialist Jirsch Sutherland will help protect some subcontractors, he agrees the industry will be at the mercy of its old ways for some time to come. The NSW Supreme Court ruling, he says, makes the NSW Security of Payment Act available to entities in administration—regardless of their solvency—by allowing the recovery of debts owed to a creditor and “will help protect subcontractors”. It also could have similar ramifications in other states. “Construction companies facing cashflow difficulties and which enter into administration now have a far greater chance of pursuing and being paid by their debtors,” Terry-Whitall says. “The decision has far-reaching implications for construction companies as a whole, particularly during the current economic climate, which is placing further cashflow pressures on an already strained industry.” ▲ Chamberlains director of legal Michael Terry-Whitehall says cashflow is still king but the Security of Payments Act in NSW could shift the needle. But he adds: “Unfortunately, the industry still has so far to go. “Truth be told, the manner in which the industry is operating, even as a regulated industry, it’s still just so dramatically exposed with the cash flow pressures and the margins that they operate on. And, plus, you've got some industry players who capitalise on this … they've been structured and set up in a way to literally cannibalise industry and bury their subcontractors. And that as a practice is still going on.” Arrears ramping up Building Industry Credit Bureau executive director Wayne Clark says the latest data and dialogue among its ranks of members—including some of the country’s largest building suppliers—does not not bode well for what is to come in the next 12 months and possibly longer. “The data that we're getting is now meshing with the anecdotal evidence that we've got from our meetings, where members are starting to get more outstanding debt problems and they're certainly getting concerned about some of their customers that are delinquent in terms of their payment patterns,” he says. Significantly, the latest numbers being crunched from the BICB database indicate the accumulation of debt above 60 days was now on a rapidly rising trajectory after plunging during the pandemic. The monthly level of outstanding debt has increased from 5.9 per cent in November last year to 11.7 per cent in January. “It remained consistently low right through until around about November-December last year,” Clark says. “And then it started to climb. “Normally, we do see a spike in the December-January period. But what we’re seeing come through the February data is that the pattern of higher debts above 60 days is continuing. Total consolidated debt above 60 days ▲ Source: BICB “That's an indication of cash flow issues in the industry and definitely a big warning sign. “The risk has gone up a fairly substantial amount in the last few months,” Clark says. “That's being reflected in the subsequent increase in insolvencies that we've seen. “And we think that it is going to keep building and these figures will go up.” According to the BICB’s forecast, construction industry insolvencies are trending to hit 1795 by the end of June—an increase of about 40 per cent on the previous financial year and the highest level since 2013-14 (1802). The new data also shows that construction-related companies now account for 31.52 per cent of all insolvencies in Australia—up from 19.72 per cent in 2020-21 and 26.1 per cent in 2021-22. Red flags for second quarter Recently released figures from the Australian Securities and Investments Commission show liquidations, receiverships and administrations across the beleaguered sector are already almost double the number of industry casualties for the same period last year. To date, it has reported a total of 1284 collapses of construction-related companies this financial year—jumping from 657 for the same period last year and equal with the 2021-22 full-year tally. The red flags are flying, says Altus Group’s Asia Pacific president of cost and project management Niall McSweeney. “We still have another quarter and a bit to go and we're already at a higher level of failures in the industry than we were in the whole lot of last year. “And, cyclically, this is actually the danger period … the second quarter is usually where people start to struggle. “One of the problems now is if they haven’t built themselves up a bit of a war chest, they're not going to survive any of the turmoil that could come,” McSweeney says. “You know, what happens when we have got an issue in regards to debt and the cost of debt that’s coming later on in the year? … it could have a serious impact.” Looking forward, McSweeney says: “There's still a lot of people with legacy contracts that have a disproportionate amount of risk sitting with the delivery partners. There's going to be pushback against that. But equally, you know, people who are best suited to actually take on that risk should take on that risk. It's not always the builder.” Tradies walking away from sector Such are the pressure-cooker risks of riding out the construction sector’s profitless boom, builders and subcontractors also have been taking their future into their own hands, shutting up shop and walking away from it all before it's too late. ▲ Master Builders Queensland chief executive Paul Bidwell says "it's not worth the effort" for many contractors and subcontractors now. In Queensland, unprecedented demand for building services has been matched by an increase in licences, taking the overall total number of licensees in the state from 107,300 in 2019-20 to 114,230 by the end of February this year. However, the Queensland Building and Construction Commission's records also show that more than 18,400 licences have been cancelled—albeit for a variety of reasons—over the same almost three-year period. Notably, this included a total of 4428 licences cancelled at the request of contractors and 9806 cancelled due to the annual licence fee not being paid. “If you're taking on too much risk … you can’t continue to do that,” McSweeney says. “It's an unsustainable sort of situation where eventually something has to give. “And let's be honest, if you're not making money or worse still you're losing money hand over fist, you’re better off sitting on the beach—it's a lot less stressful.” Master Builders Queensland chief executive Paul Bidwell says for many—including some well-established contractors—construction has become “just too hard”. “We do a survey of our members and the point was made that there's so much regulation, so much red tape, so much risk as well. I mean, the red tape is not reducing the risk. It is becoming not worth the effort.” Off the top of his head, Bidwell rattles off the names of a string of companies that have gone to the wall during the past couple of years. They include Canberra-based PBS Building, a 33-year-old which put its NSW, ACT and Queensland businesses into voluntary administration last week owing—based on a preliminary review—more than $25 million to 1000 secured and unsecured creditors. “We are the latest, but we won’t be the last construction group to buckle under the weight of a broken industry and way of doing business that needs urgent reform,” PBS founder Ian Carter said. He wasn’t wrong, more collapses have already followed. “It’s a growing list, unfortunately,” Bidwell says. “And the conditions are still tough and we have the same sort of problems … there are still issues with materials and trades are still difficult. ▲ New data indicates construction insolvencies are on track to hit the highest level in a decade. “At the same time, there’s a lot of builders also that have been remarkably resilient,” he says. “They've done whatever they can to reduce costs, you know, they've disposed of assets, trying to reduce debt, trying to prop up their balance sheet. “So, we sincerely hope that it doesn't play out the way that everyone is talking ... and we're hoping we'll shake it all off at the end of this year. “But no one's suggesting it's going to be any sooner. And there's no joy yet—it's all still going the wrong way.” As a front-end construction lawyer, Doyle says a shift is already occurring in terms of the conversations occurring at the building contract drafting table. “There aren’t enough contractors to do the work at the moment. That is a real issue and there has been a recognition that the subcontractor market is different and you need to contract differently. “Because it’s such a tight market, your relationship with your subcontractors is king now,” she says. “And when we’re drafting now, we’re addressing the commercial realities of the project instead of drafting for the black letter of the law.” Collaborative contracting, Doyle says, will be the industry’s big disruptor going forward. “What we’re learning is that we're better when we deal with risk appropriately and that it requires a good conversation. “And I think people will be remunerated for collaborating more ... that's where we're going to see the real shift and I hope that perpetuates. “The industry has to change otherwise it will implode if market conditions stay the same.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Construction
Phil Bartsch
Wed 15 Mar 23

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