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.