The parent company which placed Australian construction giant Probuild and several other construction firms into administration last week has blamed market conditions including excessive competition, unsustainable margins and COVID related challenges for its decision.

In a statement last week, South African construction giant Wilson Bayly Homes – Ovcon Limited announced that it had appointed Deloitte as an administrator for its Australian based subsidiary WBHOA after making a decision to refrain from providing additional financial support to the company.

All up, WBHOA has eighteen businesses which include Probuild, Monaco Hickey and WHBO Infrastructure.

Put together, these have combined revenues of $1.4 billon, 18 major commercial and public sector projects in varying stages of development, around 750 employees and thousands more contractors and subcontractors who work on their projects.

Deloitte says it will now seek potential buyers for the businesses.

In its announcement, WBHO said it had implemented contingency plans for its Australian business after a near $300 million sale of Probuild to China State Construction Engineering Corporation was blocked by the Federal Government in January last year.

This included a revised strategy for Probuild which was aimed at stabilising the business based around a more conservative bidding strategy that focused around less complicated and lower-risk projects.

However, this has been made more difficult by several factors.

These include a pull-back in commercial activity and the number of projects going to market on account of COVID restrictions, a market which was increasingly competitive and contractual and margins which were not sustainable or commensurate with the risk profile of work on offer.

“The Australian construction environment has also become increasingly competitive and contractual, in our view, the potential risk on large mega-building projects outweighs the current margins available,” the company said in a statement.

“With this in mind, the Company has adopted a more conservative bidding strategy focused on securing lower-risk and less complicated projects. Based on this approach, it was the Company’s intention to see some decline in the order book as we reduced our exposure to high-risk projects. However, sourcing acceptable projects has been made more difficult with procurement activity and the number of available projects being impacted by Covid-19.

“The Australian government’s hard-line approach of managing Covid-19 through a combination of border restrictions, snap lockdowns and mandatory work-from-home regulations for many sectors, has had a considerable impact on property markets as well as other industries such as the leisure industry. Border restrictions have resulted in hundreds of thousands of foreign students, tourists and investors unable to gain entry to the country. Population levels in the two major cities of Melbourne and Sydney have shown negative growth as a result. The impact of lockdown restrictions on the retail, hotel and leisure and commercial office sectors of building markets have created high levels of business uncertainty in Australia and have significantly reduced demand and delayed the award of new projects in these key sectors of the construction industry.”

In its statement, WBHO added that it had made financial losses as a result of cost overruns and delays which had not be able to be recovered through variations

The group said it had provided R2billion ($A181 million) in support of its Australian subsidiary.

The collapse of Probuild has sparked growing concern about the potential for more insolvencies in construction and for subcontractors to miss out on payments owed to them during insolvency events.

Whilst construction insolvency appointments remain below pre-covid levels (ASIC data, December quarter 2021), there are signs that construction firms are feeling pressure from suppliers.

Recent data from credit reporting agency CreditorWatch found that 12.4 percent of construction businesses are more than 60 days behind in paying their bills.

Such difficulties are likely to intensify in light of persistent shortages and cost increases for materials and trades.

Meanwhile, subcontractor organisations are warning that the affect upon subcontractors from the insolvency of major contractors can be severe.

Oliva Judd, CEO of the National Electrical and Communications Association which represents electrical subcontractors, has warned that subcontractors as unsecured creditors are last to receive payment and frequently receive only a few cents in the dollar which they are owed for work on which they have performed.