Risky business: why builders are leading insolvency numbers

Things are only likely to get worse for building companies, experts say, unless there is serious change in what one described as an "inherently risky" industry.

Well-established builders Project Coordination and Rork Projects were among four Canberra construction firms that went bust within a month.

Insolvencies across all industries have been trending up since the end of COVID restrictions.

When the pandemic was at its peak and the Tax Office was more lenient on businesses, annual administrations were less than 5000.

Last year saw a return to pre-COVID levels of insolvency, when 7942 businesses entered external administration. Numbers for this financial year are tracking higher again.

For the financial year so far, 6610 businesses have entered administration, well above the 4854 at the same point last year.

An analysis of insolvency numbers against the number of Australian businesses shows the figures are still below long-term averages.

The construction industry, however, appeared to be taking a "disproportionate hit", Australian Restructuring Insolvency and Turnaround Association chief executive John Winter said.

Building company administrations so far this financial year are already tracking well above previous years, data from Australian Securities and Investments Commission (ASIC) shows.

In the financial year to date, 1913 businesses in the construction industry have entered external administration.

This year's figures are higher than this time last year (1447 construction companies) and more than double figures from the same time in 2022, (739 construction companies).

Construction companies typically take up a large portion of Australian business collapses for a few reasons, Mr Winter said.

He said construction was "inherently risky" and susceptible to various external factors.

Fixed-price contracts, increased labour and material prices, construction delays and higher interest rates were just a few.

RSM Australia partner Jonathon Colbran, who has led a number of high-profile builder administrations in Canberra, said projects were also often quoted long before work started.

"There can be a myriad of factors beyond the builder's control that can impact the project and can cause delays. Those delays can cost money and, ultimately, often borne by the builder," he said.

All of this is compounded when you consider the "really narrow margins" many in the industry were already running on, Mr Winter said.

The structure of property and construction companies may also contribute to higher insolvency numbers compared to other industries.

"When a property development company goes, it generally goes with a number of businesses attached," Mr Winter said.

"So very rarely do you have a single corporate entity that goes broke."

Eddie Senatore, a Canberra business and insolvency adviser, said construction companies had been leading the insolvency figures for decades.

The factors that contribute to high insolvency rates may change, but it comes down to financial management, Mr Senatore said.

While bookkeepers and accountants played an important role in that, it was also the responsibility of builders themselves to be proactive in managing finances, he said.

"I don't think a lot of builders get down in the nitty gritty and [have] the discipline of sitting down every week and going through their jobs as to what's left to do on the build, how long it's going to take, what's it going to cost," Mr Senatore said.

Some insolvencies were a necessary part of the economy, Mr Colbran said.

"Businesses will fail. It's the nature of taking risk and entering into business and operating," he said.

Lower levels of insolvency across all sectors between 2020 and 2022 can be attributed to the more relaxed approach the federal government took during the worst of the pandemic.

There was temporary relief for financially distressed businesses and protections for directors who were trading insolvent.

For the past year, the Tax Office has been returning to what it calls "business-as-usual debt collection".

While some have blamed it for a surge in insolvencies, the Tax Office's return to the marketplace was "way overdue" Mr Winter said.

"A lot of businesses have been knowingly allowed to build up levels of debt that are deeply problematic," he said.

Since the Tax Office's return, businesses have been hit with overdue debt warning letters and director penalty notices.

"They've not gone back to the same level of wind ups that they used to but they've tried to push people to make decisions about the viability of their business," Mr Winter said.

"And that has driven insolvencies, but it's driven insolvencies into businesses that needed to be closed."

Mr Winter said construction businesses would continue to fail if fixed price contracts remained the norm.

In fixed price contracts the builder wears any costs above the fixed price, except for variations by the client.

Fixed prices were particularly risky in what Mr Winter expected would be an "unstable business environment over the next couple of years".

"That's a recipe for disaster," he said.

But shifting away from fixed contracts wasn't going to be an easy move, Mr Senatore said, given most banks require them to provide finance.

"If clients are borrowing money, the banks like to know what the client is going to end up having as the value of the build so that their lending ratios stack up," he said.

Mr Colbran said when construction businesses failed, everyone from subcontractors to taxpayers were affected.

"For that reason, I think, key stakeholders need to come together and work together to find a way forward," he said.