As many as 2,663 businesses with the construction sector in Australia are at risk of financial collapse over the course of the next twelve months, a report from a leading accountancy practice suggests.

Unveiling the results of its latest Commercial Risk Outlook Report, accounting and advisory outfit SV Partners has found that 2,663 businesses within the building sector rank in the highest category of risk out of ten possible categories in terms of the likelihood that they will default on a payment within the next twelve months.

This means that 1.6 percent of all businesses within the sector which fit into such a category – more than double the proportion of businesses across all categories which fit into this category.

Perhaps surprisingly, New South Wales appears to be the highest area of risk in terms of states, with 1,140 construction businesses or 3.61 percent of all construction businesses falling within the highest risk category.

By that score, construction businesses are almost three times as likely as their counterparts in other sectors to fall within the highest possible area of financial risk.

Construction businesses are also almost three times more likely to default on payments compared with their counterparts from other industries in Victoria and are more than twice as likely to do so in Queensland and Tasmania. Specified data for other states was not set given.

Based around a range of bureau data from the previous five years, the scorecard takes into account Mercantile enquiries, financial default and trading payment history.

From this, firms are assigned an overall score from one to ten, with firms with a score of one ranking within the highest risk category for default.

The latest data follows the Senate Inquiry into Insolvency in the Construction Industry, which handed down its final report last year in which it suggested that causes of high incidences of insolvency within the sector included unequal power relations within commercial relationships, a ‘culture of non-payment’ and in some cases, outright fraud.

Thus far, the government is yet to respond to that report despite the report being handed down last December.

In its report, SV suggested other factors were also at play.

“SV Partners also suggests that from experience, construction companies are concerned with the lead times on projects and the increase in costs to complete these projects with regards to time constraints,” the report said.

“These costs place extreme financial pressure on these construction businesses and adds to their inability to meet and pay their bills in line with their contractual obligations, further affecting those contractors and subcontractors that have been locked into fixed price contracts.”

In the year to March, data from the Australian Securities and Investments Commission indicates that 2,098 businesses within the construction sector in Australia entered insolvency.

According to liquidator reports, common causes of failure within the sector include high levels of cash use or inadequate cash flow and poor strategic management of the business.

  • The end of the BOOM! Perhaps now State governments shall make security of payment mandatory? The cost of 3% of construction firms becoming bankrupt must consider the cost to remaining firms in terms of their risk profile and borrowing costs. 3% in one year at the end of a boom, though around 10%-12% each decade is a huge cost to the industry. many are forced to the wall because of erroneous non-payment of invoices. An insurance system for smaller firms to ensure payments were honoured would reduce the risk profile and improve survivability. A 1% insurance or levy on all contracts below a threshold to pay out on insolvency to smaller contractors and firms. The overall disruption and cost to the economy is far greater and the flow on is likely to make any downturn much deeper and prolonged.

  • The senate inquiry was also advised by the ATO and ASIC of an emerging business model which is basically a pre – packaged liquidation. They feature 6 months of meticulous planning, pre appointment asset transfer, secured creditors paid, subcontractors revenue targeted, $0 return for same, bogus counter claims from clients, lack of investigation of those claims, compromised reporting to ASIC and no prosecutions for insolvent trading, director's failure or fraud. In QLD since Walton collapsed in late 2013 there has been about 11 of these pre-packs costing 2600 small business in excss of $120m and 2 more recently The 2014 amendments made this process a lot easier. This process is not a business model – it is fraud and these directors should be prosecuted.
    In Qld a small number of insolvency firms share the insolvency appointments after possibly obtaining privileged financial information regarding construction companies and approach these companies to pre pack. . SV Partners recently reported that 4 large QLD construction companies were " at risk" . How do they know? Any warning given to subcontractors and suppliers? Any management of the building licenses to manage the fall out?

  • Lets not forget the retention that has been collected. These monies are not for the Builder, they are for any fault rectification that may be required during the defects liability period. However, as the building company enter into receivership the retention is also classed as builders asset.
    Time to have a separate body holding these monies.!!!