Signs that Probuild may have been in trouble have been evident for months, a leading credit reporting firm says.

Credit reporting agency CreditorWatch says it has given the company either a D1 or D2 rating score since October.

At this score – the company is considered to be vulnerable and be high risk from a credit perspective (fourteen credit scores are available ranging from very low risk at A1 to default at F).

With such a ranking, subcontractors and suppliers had been advised to refuse credit and to restrict trade to a cash on delivery basis.

According to CreditorWatch, red flags about Probuild were evident in three areas:

• A ramp up in the number of credit inquiries, which saw the company have 1,588 credit inquiries over the past five years including 542 which were lodged over the past twelve months. This increase is in line with the broader construction industry, which currently sits at the top of the ANZSIC Division for credit inquiries on 255.
• A more than doubling in repayment times from just under 28 days in March 2021 to 58 days in February 2022. This spike contrasted with the broader construction industry which maintained an average repayment time of seven days in both 2021 and 2022.
• Three court actions lodged against the company – two of which came in quick succession in October and November last year.

Experts warn that the Probuild collapse may be the tip of the iceberg – especially with the industry needing to manage cost and time blowouts as a result of labour and material shortages.

At this stage, insolvency activity in construction remains comparatively low by historic standards.

According to ASIC data, 328 construction firms entered external administration during the December quarter.

At this level, the number of external administration appointments is above levels seen during COVID (during which time insolvencies have been kept low by business support and special insolvency rules), but remains below the 350-400 administration appointments which were generally observed for the industry on a quarterly basis during years leading up to the pandemic.

Still, Probuild is not the only contractor to go under this year.

Already in 2022, Melbourne-based ABD Group went into liquidation with creditors believed to be owed $80 million while Brisbane based Privium went into voluntary administration with estimated debts of $28 million.

Moreover, signs of stress are emerging.

Data from CreditorWatch’s February Business Risk Index showed that 12.4 per cent of businesses in construction were in arrears regarding payment of more than 60 days – the worst payment performance of any industry.

“The Probuild collapse shows we are past the ‘canary in the coal mine’ stage of impending trouble in the sector,” James Flaherty, Convener at insolvency advice firm Insolve Panel, said.

“There will not only be a knock on effect from other businesses being taken down by this collapse, but it’s also indicative of a broader problem in the construction industry”.

Meanwhile, CreditorWatch Chief Economist Harley Dale predicted darker times ahead in commercial construction.

“The construction industry was arguably facing tough times before COVID, with the pandemic exacerbating those existing pressures,” Dale said.

”Companies were stretched in 2018/19 and over 2019/20 and then 2020/21 blew things out of the water. That situation persists today.

“There’s no doubt a great number of commercial construction companies are under the hammer right now and what happened to Probuild has an adverse impact on confidence and on the ability of businesses to access any required additional finance, which is likely to become a prominent issue in 2022.

“What the Probuild demise reminds us is that the ‘new world’ 2022 doesn’t work for businesses with legacy issues, and what is happening to Probuild may be a portent for darker times ahead for the commercial construction industry.”

Ginette Muller, General Manager at Advisory Services Australia said common reasons for business failure revolve around uncer capitalisation and unrealistically low quotes in respect of labor and supplies.

In regard to Probuild’s case specifically, Muller says an added factor will be ‘the supply chain going to hell in a handbasket’.

Whilst some insolvencies can be attributed to COVID, Muller says this will not be the case with all insolvencies.