The Building Industry Crisis & the wider Implications for the Economy

While it’s easy to want to find a reason to blame, there needs to be a broader investigation and analysis of how these companies fell and why.

A dozen companies in liquidation in less than 5 months

The Australian building industry is in crisis – in recent times a number of major, multi-million dollar enterprises have gone into liquidation.

A few of the notable casualties are Queensland-based National Construction Management, which fell over last month, reportedly owing at least $3 million to creditors.

Sydney building company Allworks Construction declared ‘game over’ only two days later, apparently owing about $300,000. According to reports, there are also currently two staff members at the company, also the company’s two joint directors, who are owed about $200,000 in unpaid superannuation.

PBS Building, a multimillion-dollar firm which does a mix of commercial and residential projects across Queensland, NSW and the ACT, officially collapsed in March. And prior to that, three prominent building companies collapsed a day apart from each other, with NSW apartment developer EQ Constructions going bust owing up to $50 million, then Perth building company Hamlen Homes going into administration with $1.4 million reportedly owed to creditors.

Within the same week, Melbourne-based residential builder Hallbury Homes announced it was going into voluntary administration.

What the hell is going on?

It seems that most of these collapses relate to the long-term effects of two years of pandemic lockdowns which impacted the building industry considerably. Then, after the pandemic began to settle all industries began to suffer some significant problems which weren’t necessarily foreseeable – supply chain disruptions, skilled labour shortages, increasing costs of materials and logistics and transport, electricity and insurance.

On top of these issues, many of these construction companies have battled extreme weather events too, and of course, have based their pricing and their profits on contracts locked-in long ago, which offer no wriggle room when a bunch of catastrophic events occur in quick succession.

Further analysis suggests that sharp interest rate hikes have added to these companies’ woes, and lenders are becoming more cautious – this has created ‘the perfect storm.’

The domino effect

But what saddens me deeply is the ripple effect that this creates. In fact perhaps we should call it a tsunami of devastation. Creditors waiting to get paid, jobs lost, employees robbed of super, and many ordinary Australians now out of pocket – their dream homes turned into a nightmare.

The truth is that the hemorrhaging probably won’t stop here – I’d say there are several more companies to fall – the domino effect. And it could take a long time to recover from. As one victim of the Porter Davis collapse noted in an interview with the media: “Companies usually don’t go into liquidation overnight.”

He’s right.

Fiduciary duty

Senior management, and directors have a crucial responsibility here – to wave the red flags

early. There are warning signs of impending insolvency, and typically these include:

● low operating profits or cash flow from the business

● problems paying trade suppliers and other creditors on time

● trade suppliers refusing to extend your business further credit

● problems with meeting loan repayments on time or difficulty keeping within overdraft

limits

● threats of legal action over debts

Directors and senior management have fiducial responsibilities, and one of them is to ensure that a company does not trade when it is insolvent – this is a breach of the Corporations Act, and it can attract both civil and criminal penalties.

There is no shame in admitting that you’re in financial trouble. Most companies go through ups and downs. However, in all my years working as an accountant, financial advisor and business mentor, I can attest to the fact that most financial problems can be worked through IF they are identified early enough.

Early identification comes down to good accounting systems, strategic planning and risk mitigation.

Picking up the pieces

Yes, absolutely there should be greater consumer protections for these types of crises, and I hope governments will act where appropriate.

But there also needs to be broader investigation and analysis across this train wreck to work out exactly how these companies got into this level of financial trouble to begin with, and why it wasn’t identified sooner.

Figures from APRA show exposures to “land development and subdivisions” rose almost 20 per cent during 2022, to over $17 billion.

Several experts say that a lot of developments in the pipeline still ‘make sense’ financially, and certainly in time, the outlook is a positive one, with many saying the construction industry - particularly home construction – will be an industry of ‘golden opportunity.’

This, of course, is cold comfort to the victims of collapses right now.

But based on the figures above – which is really only one aspect of this industry, it is possible to guesstimate its significant value to the Australian economy. We need to ensure that the building and construction industry is appropriately financially skilled with mature expertise, wisdom and now-how so that it can better manage risk – which would then help to ensure that these types of events just don’t occur.