As many as one in two construction businesses could be experiencing cash flow pressures and at risk of insolvency, an expert has warned.
As many as one in two construction businesses could be experiencing cash flow pressures and at risk of insolvency, an expert has warned.
FTI Consulting senior managing director corporate finance and restructuring, Daniel Woodhouse, told Business News there had been almost a perfect storm in the industry, and there were signs it may get worse before it improved.
Construction has been through a challenging 18 months, with rising input costs and labour shortages.
Big-name builders such as Pindan, Jaxon and WBHO Infrastructure were among the firms to collapse.
Mr Woodhouse said it was difficult to say how many construction companies were in trouble, but anecdotal discussions suggested it could be as much as half.
“Some construction inputs are up by as much as 40 per cent,” he said.
“New home purchase prices have only increased 20 per cent.
“You're taking wafer-thin margins in that sector and eroding them even further.”
That’s in the context of construction timelines growing because of supply chain issues.
Mr Woodhouse said that meant cash inflows for businesses had slowed, but weekly and monthly expenses remained at close to the same pace.
“You've got tight project margins being eroded by the additional costs … you've got working capital being stretched to the limit in some situations,” he said.
Western Australia was probably behind the eastern states, where construction failures had reached pre-COVID levels.
The rate in WA was about a third less than that earlier period, which Mr Woodhouse said left room for a further lift.
But there could be other factors that keep a lid on insolvencies.
“Queensland has got a similar situation, a lot of construction is taking place in the mining sector,” Mr Woodhouse said.
“You've got some fairly well-heeled counterparties where completion of the project is paramount.
“It may be a situation where they are rescuing, if you like, some of those companies.
“Or it could be that in the eastern states, there were shutdowns where businesses were impacted a little harder than we were over here, which eroded cash quicker, and we’re yet to catch up to that.”
Construction companies would need to focus on margins and only sign on for projects which are profitable, he said, and if in trouble, seek advice while they still had cash.
“Cash buys you time, and time buys you options,” Mr Woodhouse said.
