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The construction industry is a large and dynamic field, accounting for 5.7 per cent of Australia’s GDP, according to the HIA Window into Housing. The industry, however, is also ranked second for insolvencies, according to March 2017 ASIC insolvency statistics, and represents 16.72 per cent of Australian business insolvencies.

Causes of insolvencies are varied. A 2015 report by the Senate Economics References Committee noted that “Inadequate cash flow or high cash use, poor strategic management of the business and poor financial control, including a lack of record-keeping, accounted for the highest number of business failures.”

The list of causes includes:

Top causes of insolvencies in the construction industry 2013-14
Undercapitalisation 436
Poor financial control, including lack of records 660
Poor management of accounts receivable 336
Poor strategic management of business 892
Inadequate cash flow or high cash use 1000
Poor economic conditions 558
Natural disaster 17
Fraud 30
DOCA failed 35
Dispute among directors 52
Trading losses 698
Industry restructuring 50
Other 611
total: 5374

Problems involving record keeping and business management abound, according to the report. According to Peter Donovan of Software firm Bizprac, many builders have little experience in managing a business, especially a growing business.

“They start off slowly, and it's doing well, and as they grow they just don’t have the business experience to manage the business side of it properly," Donovan said. "So while they can do the work on site quite well, it’s the experience of managing the business, managing the money coming in and the costs, et cetera, that lets them down.”

Many builders like the on-site work, as that’s their background. They want to delegate the office work, or worse, mostly ignore it. They treat the business side of the business in an ad hoc fashion, just going with their gut.

“One business owner was going out quoting on commercial fitting out works for the big shopping centres,” Donovan noted. “He would just walk in there, walk around, and then just pull a figure out of the air, not do not do any estimating at all. Then he’d give the bid to the shopping centre manager and tell his team to make it work. It is simply not sensible, it’s not good business practice at all, but this is what some of them still do today.”

When a builder is working on a few small projects, that approach might work, Donovan said, if he knows all his costs and prices. But as the jobs get bigger and more frequent, that approach is no longer viable, and being off on estimating by just a few per cent can lead to a firm losing money.

Those problems, however, are readily addressed by industry-specific software that provides a real-time view of a builder’s finances and helps the business owner to avoid the financial troubles that lead to insolvency. The software integrates with estimating, ordering, and suppliers’ software, so additional data entry is not required.

Business owners can watch each individual job’s profit or loss on a daily basis to determine where losses are occurring and if profits are as expected.

“It's the whole idea of looking at your jobs as you go so your estimates on your future jobs are going to be far more accurate and you're going to be assured of the profit that you expect to get out of each and every one,” Donovan said.

While employees can be tasked with keeping track of profit and loss, Donovan said it’s incumbent on owners to oversee the business.

In addition to the business overview, business owners need to maintain security and continuously monitor for fraud, added Kevin Hessey, also with Bizprac.

“These things need to be handled behind the scenes so no one is aware of them other than the business owner,” he said, adding that a good software package can track logins and create a behind-the-scenes audit trail for every change to data, including dates and time stamps. “Unless you’ve got that ability to track user activity, fraud that can be perpetrated against companies can be very hard to detect.”

Standard accounting software offers limited functionality for builders, Hessey said.

“They are just looking historically. They look at invoices coming in, allocated to jobs but not orders and there are no tools to recognise flawed planning," he said. "And that's a critical part—there’s no point waiting until the end of the year to see if you made a profit or loss for the last year. You need to know on all the jobs in real time.”

Builders that want to grow their business, Donovan added, need to develop the habit of a daily overview of the business.

“At the end of the day, that's what keeps you in business, keeps food on your table, and a roof over your head,” he said.

 
  • Steve, amongst the challenges facing the construction industry is a lack of reasoning as to why businesses have a viable value proposition and then, an understanding about how to grow a profitable and successful enterprise. Sourceable published two articles on these subjects last year. The first: https://sourceable.net/is-this-a-business-if-so-whats-the-story/ , and the second: https://sourceable.net/creating-a-valuable-modern-construction-enterprise/. Your readers may find reading these of interest, possibly helpful. The reality is that for many of Australia's 200,000 construction enterprises the future is bleak. As the construction industry's traditional business model transforms most will be too slow to adapt. There are already noticeable first movers who can demonstrate what this is all about. Alas for most denial and self-serving defences by industry associations who advocate for the lowest common denominator do so at huge detriment to those who are prepared to invest in their businesses, and in building sustainable capabilities. The next 5-years will see a lot of clearing out in construction, and yes more insolvencies. Its that time in the cycle again as much as anything else. The prospect is however, that those who can work through construction's modern transformation, and those new start-ups that will evolve sans the baggage of the past, will thrive.

  • Steve, this suggests that the root cause of 'insolvencies' is the fault of incompetent building businesses – that they lack business skills, planning, capital, etc. However, it was my understanding from the Senate Inquiry's findings – the Report called 'I JUST WANT TO BE PAID' – that many subcontractor businesses went under through no fault of their own. Rather not being paid by the lead contractor was the undeniable cause, and this a regular feature for small to medium businesses, forcing businesses into stress with many forced into insolvency as a direct cause of big business fraud (here listed at 30%).
    In relation to 'domestic building' companies who manage to become insolvent in huge numbers every day of the week – think Bob Day, Watersun Homes, etc. – many have the exit strategy in place and do a 'phoenix' having risen from the 'ashes' before they have been burned! How do the smaller players compete? They cannot under the biased 'legislated uneven playing field'! Pretty clever? No, just requiring highly paid creative accountants happy to support the crooks! As for the carnage left behind – the owners, the SME subbies and the workers – too bad if they lose their livelihood, go broke, die, suicide and their families and workers suffer! As for consumers, no concern for any of them suffering the same fate!
    Hence, I wonder about the 'blaming the lack of business skills' – or the universal 'blame the victims' ruse. It seems to me that this may be a bit simplistic when the majority of 'insolvencies' are not simple. As in the case of the intentional use of non-compliant products where consumers and workers and subcontractors are art risk of serious damage, so too the legalized fraud against all three key stakeholders.
    I understand that everything is open to interpretation but the 'phoenix' trick is very well documented.
    Donovan suggest building businesses do not have experience managing a business. I would suggest that for far too many that is not even on the radar. Rather their business has nothing whatsoever to do with building. Rather their focus is making lots of money – however that can be achieved!

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