Construction Sector Insolvencies Surge 40pc

Cashflows Driving Construction Insolvencies Spike

CONSTRUCTION MARISA?WIKRAMANAYAKE FRI 11 FEB 22 The Urban Developer

A sustained decline in?cashflow?has been predicted as the key driver for insolvencies in 2022.

The prediction in Creditor Watch’s Business Risk Report for January comes as?ASIC’s?latest data on insolvencies shows a 38 per cent increase in insolvencies in the construction sector.

The number of construction firms going into external administration jumped from 237 in the third quarter of 2021 to 328 in the fourth quarter of 2021.

As well, the number of court actions in the month was 58 per cent above the last quarter compared to the corresponding period the previous year.

From 2020 to 2021 there was a 17 per cent increase in the insolvency rate for the construction sector.

Creditor Watch said that the construction industry was the industry with the highest arrears with 12.41 per cent of the sector affected.

The accommodation sector followed with 10.92 per cent and IT with 10.77 per cent.

The Creditor Watch report also said the construction sector’s unique payment structures played a part in the high rate of insolvencies.

Earlytrade’s Supply Chain Scorecard Report also pointed to the ASIC data, saying that November 2021’s figures alone showed a 57 per cent increase in insolvencies as the effects of both restrictions and the withdrawal of government support were felt.

The report also said that the uplift in major public infrastructure activity would increase, reaching $52 billion by 2023, would be affected by supply chain concerns, material cost increases, and labour shortages and restrictions.

“A tsunami of projects is cresting in 2023, at precisely the time cost pressures—inflation, materials, insurance—and competition for skilled workers are escalating for the industry,” Early Trade’s chief executive Guy Saxelby said.

Subcontractors usually operate on 30-day payment terms but are now seeking for early payment options.

“Early trade?has seen a five-fold increase in subcontractor registrations as our clients try to drive productivity and offer more to?subbies?by way of technology,”?Saxelby?said.

“Often for?subbies, it comes down to cash flow and cash conversion—with better cash-flow flexibility comes the control to manage forward orders, retain staff and successfully navigate the boom.”

The Australian Construction Association said that if the gap in productivity growth between the construction industry and other industries during the past 30 years could be halved, it would generate $15 billion in infrastructure every year for the same expenditure and employ another 15,000 people.

“To deliver the record pipeline of infrastructure projects, the industry must innovate to find ways to do more with less … closing the gap in productivity growth between construction and other major industries is essential,” association chief executive Jon Davies said.

Meanwhile, Western Australia remains the best performing state, according to the ASIC data, boosted by its mining and agricultural sectors.

NSW had the most regions with the highest default risks, most notably Bringelly-Green Valley with 7.81 per cent and Guildford-Merrylands with 7.84 per cent. Northern Sydney and regional industrial areas remain steady but West Sydney is struggling with default risk as many people living in West Sydney cannot work from home and are affected adversely by restrictions.

North Queensland and agricultural centres are performing better than tourism areas and the Gold Coast.

The healthcare sector remains the safest industry in terms of default risk and arrears.

Nationally, the default risk sits at 5.7 per cent.

AUTHOR: Marisa?Wikramanayake