06/10/2021 - 08:00

Debts hammer construction sector

06/10/2021 - 08:00

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A rapid swing in momentum in the construction market has toppled businesses, and there are signs more could follow.

Pindan and Jaxon both went into administration this year. Photo: David Henry

The recent collapses of Pindan and Jaxon with combined debts of $90 million shocked observers in a construction market that is white hot. 

But the speed with which that hot market accelerated is a contributing factor to the pressure in the industry. 

Two data points obtained by Business News reveal the industry may have more turmoil ahead in Western Australia. 

About 8.1 per cent of WA debts collated by the Building Industry Credit Bureau are overdue more than 60 days. 

That’s well above the national level of 3.5 per cent, and second only to New South Wales, where 8.4 per cent of debts are past that two-month payment window. 

BICB is a Brisbane-based organisation that pools data on about $3 billion of trading debts every month from its members. 

The national proportion of debts delayed more than 60 days had been at record lows for 14 months, executive director Wayne Clark told Business News, despite a highly unusual construction market. 

“Nobody’s ever seen anything like this before,” he said. 

“Record activity in the construction industry, mainly because of the stimulus measures and low interest rates. 

“You’ve also got massive difficulty getting product into Australia, shortages of timber and steel … massive cost blow outs.” 

Yet insolvencies had been at a record low nationally, he said. 

The high portion of debts unpaid after 60 days in New South Wales could in good part be attributed to COVID-19 and lockdowns in recent months, Mr Clark said. 

WA’s debts are more complicated, as detailed below. 

The second notable number is from RevenueWA, the state’s tax collecting agency. 

Construction is the industry with the second highest debts owed to RevenueWA, data obtained by Business News reveals. 

About $7.2 million is owed by construction companies, a figure which would include overdue payments on payroll, stamp duty and land taxes. 

The number is more than triple the debts owed by the retail industry, which has borne the brunt of COVID-19 lockdown rules. 

It’s worth noting this is not necessarily unusual. 

A report by the federal Inspector General of Taxation in June showed the construction industry nationally owed $7.2 billion of undisputed tax debts to the Australian Taxation Office at the end of the 2020 financial year. 

That was up 58 per cent from four years earlier, and the highest of any industry. 

“This analysis showed that the construction and professional, scientific and technical services industry groups had disproportionately higher levels of collectable debt compared with their employment levels and EBITDA,” the inspector general’s report said. 

Jirsch Sutherland partner Andrew Spring said small to medium enterprise debt was particularly focused in construction, at about one third of tax office SME debts as at June 2020. 

“The construction industry has traditionally accounted for a disproportionately high level of insolvency appointments,” Mr Spring said in a recent market commentary note. 

He said action needed to be taken to address potentially terminal businesses. 

The tax office is often the creditor which moves to push a business into insolvency, and it has been particularly lenient in the past 18 months during COVID-19. 

Safe harbour provisions for directors also gave respite for businesses from the start of COVID-19 until March this year. 

The provisions were a temporary federal government move to relax rules around insolvent trading. 

That has meant a lower than expected level of insolvencies. 

In the year to August, 214 WA business entities have moved into administration, including 38 in the construction sector, Australian Securities and Investments Commission data shows.

The debt numbers give an indicator that more may follow. 

However, it may also reflect a Continued on page 6 long-term trend in construction of delayed payments, and the stresses of managing working capital between many competing demands.

House of cards 

EY partner Sam Freeman was appointed as an administrator of both Jaxon and Pindan

Mr Freeman told Business News construction businesses generally were being squeezed between fixed price contracts set last year and rising material prices. 

“What we’re experiencing in Perth at the moment is the climate of this rapid increase in input costs to the projects, coupled with wage pressure and the [tight] employment market,” he said. 

The rapid acceleration of the market has meant that some contracts signed at low prices in the downturn last year were left underwater. 

Delays in completion, either through staff shortages or material shortages, also drain the working capital of construction businesses. 

Mr Freeman said contractors might need to raise equity to support their balance sheets, while project proponents should be open to renegotiating deals if necessary. 

Both the Pindan and Jaxon failures led to renewed calls for protections for subcontractors. “Certainly, there will be others experiencing similar challenges.” 

Pindan and Jaxon have been high profile, but other contractors with links to the building industry have had their own challenges. 

Sometimes, the cause is a difference of opinion between directors, or can be unique to the business. 

WA Insolvency Solutions partner Jimmy Trpcevski highlighted additional issues in construction, including contract variations not being approved, and the impact on cash flow of delays. 

“They gear up for a job and the job doesn’t start for a long time,” Mr Trpcevski said. 

The state government passed legislation to improve protections, although it was criticised for not including cascading statutory trusts or project bank accounts. 

The measures are not without drawbacks, including higher compliance costs, and won’t specifically address the underlying causes of builders hitting the wall. 

Mr Freeman said project bank accounts might help to keep subcontractors safe but would not ensure builders were able to complete projects. 

“There’s good intentions around project bank accounts, they have protected some people,” he said. 

“If you’re looking to engage a builder, you can’t just look at part of a puzzle, you’ve got to look at their entire portfolio. 

“If one project stops … it can be enough to upset (everything) else.” Reporting by Business News has suggested that might have been the case with Pindan and Jaxon

Pindan was under pressure from two projects, Business News has reported: a $90 million construction contract with Rio Tinto for an accommodation camp at Gudai-Darri, north-west of Newman, and a $42 million redevelopment at Northam Health Service. 

For Jaxon, building stage two of Forrest Hall at the University of Western Australia is understood to have been the challenging contract. 

In both cases, the companies entered administration and were forced to pause their portfolio of projects. 

“You need a holistic solution, sufficient working capital to meet the structure and cost base you’re working in,” Mr Freeman said. 

“We’ve been operating in a climate where there’s been (substantial) access to capital for some time.” 

He said businesses might need to take on equity to put their balance sheets under less stress if debts are high. 

Mr Freeman said there was talk in the market that other businesses faced similar challenges. 

Proponents would need to consider the risks of squeezing contractors. 

“It might cost more to complete the project, but (renegotiating prices) will ultimately cost less than getting in a new builder,” he said. 

“Whether or not we see more (failures) … that’s a crystal ball.

“That lag diminishes working capital.”

But the most important underlying issue he had seen was usually poor controls in a business. 

While there were external factors that would create pressure, this was the one key thing a business could control. 

“(A problem is) poor record keeping and not having readily available financial information,” he said. 

“Just not there … or not up to date and not accurate.” 

Key here was to take advice when things are going wrong. 

“It’s a difficult position to put their hand up and ask for help,” Mr Trpcevski said. 

“They care, they love what they do. 

No one wants to fail. 

“In the heat of the moment, you always believe things are going to turnaround.” 

* Business News would like to make it clear that Lacey Holdings Pty Ltd trading as Centro Crane is a separate business from the Centro Crane Hire entity listed above (in liquidation) and continues to trade.

Going up 

Steel rebar prices rocketed earlier this year on the London Metal Exchange.

Contracts for two-month delivery moved from about $US400 per tonne two years ago to highs of more than $US850/t in May, and were trading near $US670/t in late September. 

Governments around the world moved to drive infrastructure and construction spending to stimulate economies in the aftermath of COVID-19, lifting demand. 

Yet industries also faced supply constraints as workers were often forced to stay home to stop the spread of the pandemic. 

Those two factors were a recipe for inflation in many parts of the economy. 

Timber prices lifted dramatically, too, BICB’s Mr Clark said. 

He said rising materials prices and delays in shipments were a big issue in construction, with orders now being made for products needed in March or April next year. 

“That high demand for timber is a worldwide phenomenon at the moment,” Mr Clark said.

“Houses only use steel or timber for their trusses and beams.” 

The Association of General Contractors of America issued an inflation alert to its members after the March quarter. 

“The construction industry is currently experiencing an unprecedented mix of steeply rising materials prices, snarled supply chains, and staffing difficulties, combined with slumping demand that is keeping many contractors from passing on their added costs,” the AGC said. 

Demand may not be slumping in WA, but the pressure has been there, nonetheless.

Construction work for infrastructure projects, residential housing, resources and apartments has considerable ‘substitutability’. 

Steel is an input in a mining project and for an apartment building, while an electrician could find work in many places. 

Rising demand or pressure in one sector can flow into others. 

Mining has had an unexpectedly strong 18 months, while governments have pumped up infrastructure spending and incentivised homebuilding. 

In residential construction, industry sources have highlighted government incentives as playing a key role in sending demand into a possible bubble level. 

They have included the federal government’s Homebuilder, and state government policies to offer stamp duty discounts on apartment buildings. 

There were about 1,100 dwellings approved in WA in January 2020, before the pandemic struck. 

In February this year, approvals were nearly three times higher at more than 2,900, according to the Australian Bureau of Statistics. 

That extra demand means workers and businesses will be stretched. 

Outside of home building, Civil Contractors Federation WA branch chief executive Andy Graham said so far, the civil part of the construction industry had not been hit as hard. 

Materials such as aggregates and construction sand, used for road building and other projects, had not increased as sharply, although transport costs had. 

Wages were also up, perhaps 10 per cent to 20 per cent since June last year, Mr Graham said, and equipment prices were higher too. 

“Our industry is growing, people are hiring, that’s where the competition comes in,” he said. 

Margins were tight and there was some pressure for contractors. 

“The recent insolvencies, high profile, have all been building construction, not civil, more specifically commercial building,” he said. 

Mr Graham said the perception a business could not go bust in a boom was wrong, and civil construction had its own rash of insolvencies in a period three to five years ago. 

“The real booms over the last year have been residential, driven by home building incentives, and civil, also driven by home building incentives and government accelerating its infrastructure program,” he said. 

Larger clients were usually more willing to be flexible to support contractors in challenging circumstances, Mr Graham said. 

“Ideally that’s what would happen, we’d all hope that clients would work with contractors,” he said. 

Margin call 

All this happened at a time when the industry was exposed through low margins locked in last year, industry sources have said. 

“The commercial builders, their strategy was to go in at zero (margin) and get the margin out of subbies,” one industry source said. 

There had been more than a decade of businesses going in with low margins and intending to squeeze subcontractors, they said.

“When you get busy, the subbies won’t drop their pants, and their price is the cost,” they said. 

“If you didn’t make any money on one job, you won’t make money on a thousand jobs.” 

To the point about working capital, there’s a lot to manage. 

The industry source expressed frustration about delays in council red tape and bank approvals processes, particularly to release funds. 

The builder is left trying to carry the working capital to pay out its subcontractors while waiting for cash coming in. 

GTS Advisory director Mathieu Tribut has seen first-hand the impact of higher material prices hitting a construction company, contributing to one recent insolvency he worked on.

“The company (could not) complete the project without making a loss,” Mr Tribut said. 

“The more they were working the more they were losing.” 

In the case of that business, supply and labour shortages had contributed. 

Low margins were a problem throughout the construction sector, Construction Forestry Maritime Mining Energy Union state secretary Mick Buchan told Business News. 

“There’s no room for error,” Mr Buchan said. 

He said businesses had been using low-margin bids for about seven or eight years as they sought to get work to keep their cash flowing and get through hard times. 

Developers had the upper hand in negotiations. 

One contractor on a major property development was asked to cut their price by $10 million, he said, and had to roll with the punch. 

Mr Buchan said the CFMEU would be working with the Master Builders Association on procurement changes and hoped to find common ground. 

The union’s 2019 Delivering Quality for WA report called for businesses to improve internal procurement capability and the state government to take a more focused approach to environmental, social and governance issues in tendering. 

Other recommendations included improved employment security for workers on projects, specialist programs to support mental health and prevent suicide in government projects, and for full disclosure of safety and financial records for contractors bidding for work. 

Mr Buchan said improved standards for state government contracting would lift the standard more broadly. 

Overheating It’s unusual to see a government making a political virtue out of delaying infrastructure projects. 

But that’s what the state government did in its September budget, with 16 projects delayed to take heat out of the construction market. 

The delays included the ThornlieCockburn Link and the Yanchep Rail Extension, with about $500 million of capital investment delayed beyond the 2022 financial year. 

That’s not the whole story, either, as the government is still spending more on asset investment than last year. 

It does highlight that concerns about an overheating market are widely shared. 

There were 1,727 job vacancies for labourers in Perth in August, according to federal Labour Market Information Portal data, the highest since 2011. 

There were also more than 400 spots for construction trade workers, with recent months hitting levels similar to 2014. 

For the Goldfields and southern WA, the 210 vacancies for labourers was the highest number since data started in 2010. 

However, the CFMEU’s Mr Buchan said the challenge was not a labour shortage. 

He said there was no problem getting labour for businesses with union-backed enterprise bargaining or greenfield agreements. 

There was a wage shortage, rather than a labour shortage, Mr Buchan said.

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