Documents offer an inside look at the demise of Firm Construction, in the latest instalment of a Business News series.
MORE than 130 Western Australian construction businesses went into administration in 2022.
But only one has had its eligibility for contracting with the Department of Finance suspended following a demerit scheme sanction.
Firm Construction was banned from tendering for work with the department for up to a year under the government’s Supplier Demerit Scheme, which was developed to manage ‘very poor performance’ by contractors.
The ruling was just months before the contractor fell into administration in November.
That’s just one revelation from documents provided to Business News under freedom of information laws by that government department following the demise of Firm.
Business News revealed last week that the department had referred matters to WA Police for investigation, and concerns from the company’s administrators in their creditor’s report, lodged with ASIC, that Firm may have misrepresented its financial position.
Firm was working on six projects for the Department of Finance with a total value of about $70 million, with Wellard Village Primary School and Kalamunda Senior High School the biggest.
The business won contracts under the government’s WA recovery program and had additional work on private apartment developments.
The FOI documents also show the department’s concerns over the company’s solvency, Firm’s extensive efforts to secure additional government support, and the impact of cost escalations on its projects.
The sports hall at Ocean Reef Senior High School is not complete (March 2023). Photo: Matt Mckenzie
Sanctioned
On April 27 2022, the Department of Finance’s demerit committee banned Firm from contracts with the department for 12 months, according to a letter obtained through FOI.
Six months of the ban was on a suspended basis, pending good behaviour.
“It is not appropriate for the department … to enter into contractual arrangements of any form or nature with Firm Construction,” a department letter regarding the decision under the Supplier Demerit Scheme said.
Firm’s status under the prequalification scheme for building contractors was also cancelled, with immediate effect.
That’s the scheme that checks whether companies have appropriate financial and technical skills to undertake work.
A spokesperson for the department said it had previously suspended and cancelled the status of head contractors under the prequalification scheme.
“However, this is the first time it has been the direct result of a sanction under [the] Supplier Demerit Scheme,” they said.
Last October, the contracting ban was extended to the full 12-month period, a further letter shows.
“In the period since our previous letter, we have received multiple reports of non-payment infractions involving Firm Construction,” the department wrote when it extended the ban.
The specifics of Firm’s infractions were redacted under a clause of the FOI Act, which exempts matters that could “prejudice an investigation of any contravention or possible contravention of the law in a particular case”.
“While Finance initially did what it could to support the company in difficult circumstances, several matters have been referred to the WA Police for investigation,” a spokesperson for the Department of Finance said when asked about the redaction.
“As these matters are currently under investigation, Finance is not in a position to publicly disclose the grounds for that referral, nor the actions taken against the company under its Supplier Demerit Scheme.”
A former director of Firm did not respond to requests for comment, and WA Police said it could not confirm investigations.
Balance sheets
Hours before Premier Mark McGowan revealed a mammoth $5.7 billion surplus was projected for the 2022 financial year, Firm wrote to the Department of Finance warning price escalation had affected its contracts.
It was budget day, May 12 2022.
Across the six projects with the department, Firm estimated costs had blown out by about $3.6 million, the documents released under FOI show.
The company described the market as volatile and beyond anything the business’s management had experienced in a combined 40 years of commercial building.
Firm said it was “a perfect storm”.
Lead times for orders of masonry had grown from four weeks to 20, while steel prices were up more than 50 per cent, among a raft of supply frustrations.
The business said projects awarded between the second quarter of 2021 and March 2022 had been subject to “unprecedented and unpredicted price escalations”.
“Builders in this situation are haemorrhaging money, finding themselves to be locked into fixedprice lump-sum contracts for which their monthly project costs exceed their head contract progress claims,” Firm said.
Several builders went to the wall in the preceding year, with Pindan, Jaxon, and WBHO Infrastructure among them.
Firm’s demise was still months away.
The growing damage in construction led the government to announce its Head Contractor Relief Scheme, in a bid to ease pressure on builders.
The $30 million relief scheme applied to projects awarded between October 2020 and June 2021, the period in which the government determined the industry was still adjusting to price shocks.
But Firm’s time frame did not align with that of the department, and only one of its projects qualified.
Firm approached then finance minister Tony Buti about the scheme in May, and were referred to the department.
To press its case for the relief scheme to be expanded, Firm called on lobbyists GRA Partners.
“Unfortunately, five of Firm Construction’s education projects are ineligible for both the relief scheme and the rise and fall provision,” representatives said in a letter to a minister released under FOI.
“(Firm) is seeking an urgent meeting to discuss the situation as Firm is now at the point where cost escalation on these five fixed-price projects has placed significant financial pressure on the business.”
With the company copping the penalty under the demerit scheme, and debate over relief packages ongoing, the Department of Finance moved to put Firm through its business risk assessment process.
Management accounts were submitted by Firm for the year ended June 30 2022.
Those accounts have been redacted, including under the aforementioned clause of the FOI Act that exempts issues that could “prejudice an investigation”.
A creditor’s report, filed by Firm’s administrators to the Australian Securities and Investments Commission in early March, offers more colour.
RSM partner Jerome Mohen raised concerns Firm had been insolvent from December 2021, and potentially earlier.
The builder had potentially been short on working capital by June 2020, the report said.
Those dates had not matched up with financial statements Firm had provided to “third parties”, Mr Mohen said in the report, which “prima facie appear to materially misstate the company’s working capital position”.
“In addition, I have been provided unsigned financial statements by the company’s pre-appointment external accountant, which materially differ from signed financial statements provided to third parties by the company,” Mr Mohen said.
RSM’s interpretation of Firm’s balance sheet gives a very different number from Firm’s accounts.
Firm had a working capital shortfall of almost $12 million by June 30 2022, RSM believes, an indicator of cash flow insolvency.
The business’s accounts had registered a $4.8 million surplus of working capital at that date, according to the report.
Mr Mohen said in the report that Firm’s “accounts may need to be adjusted to remove or reduce entries relating to work in progress”.
“This is due to there not appearing to be sufficient evidence in the form of working papers and calculations to support the calculation or veracity of the work in progress reported on the company’s balance sheet.”
The report also shows a dramatic drop in Firm’s income in the 2022 financial year compared to the 12 months prior.
Revenue halved, from $121.5 million to $54.8 million.
The company posted a loss of almost $10 million in the 2022 financial year, and $466,000 in the remaining months it traded.
In the weeks before administrators were appointed, the Department of Finance asked Firm on multiple occasions about the company’s solvency, the documents released under FOI show.
Another exchange, starting on October 4 2022, was sparked when the department claimed a Firm employee allegedly requested a payment be expedited “on the basis that ‘(Firm) needs the funds to pay mid-week wages’.”
“As you have recently confirmed that the company remains solvent – and this is supported by the information your staff have repeatedly provided to our business risk assessment team – I am hopeful that you can provide an explanation for the extraordinary payment request?” the department wrote.
A Firm representative played down the request, the documents show.
“(Redacted) is a little bit new to accounts receivable,” Firm wrote.
“So, he is eager and just doing his job.
“It seems that every time we ask a question or for a payment date or for something to be expedited, we get flagged and questioned.
“Surely we can still communicate freely with your team about processing all these payments.
“I mean, we’ve done the work just the same as everyone else and we are surely entitled to ask about processing of the payment.”
Firm reiterated its calls for the Department of Finance to set in place a mechanism to deal with contracts awarded in the second half of 2021.
As the business headed towards administration, a company official wrote: “I’ve worked with (Finance) since 2007, so I feel a bit embarrassed I’ve ended up in this position, as I’ve always been able to work through whatever problems have come my way and ultimately, delivered your projects.”
Restructure bid
In early November, Firm still had hopes for a rescue deal led by the department.
“Despite us being keen to support the government in its COVID relief infrastructure stimulus, the lack of price escalation on five of these projects … has been a very significant factor in a rapidly deteriorating cash position,” Firm said.
In the documents, Firm asked the department for $600,000 to cover cost escalation, and a pool of working capital so the company could trade through administration.
The department knocked back the proposal, saying most of Firm’s financial problems appeared to be attributable to losses on private-sector projects.
“While we appreciate that the costs incurred on the department’s projects are not an insignificant amount, they collectively represent around 3.8 per cent of the value of the six contracts … and it remains unclear to the department why those costs could not be absorbed within your working capital.”
A November 10 letter from the State Solicitor’s Office, released under FOI, said the terms were unfavourable for the government.
“The department has lost confidence in FCPL’s (Firm’s) ability to appropriately manage its corporate and financial affairs, casting serious doubt of any future engagement, from both a management and service delivery perspective,” SSO wrote.
“The majority of financial losses that appear to have affected FPCL’s solvency and liquidity appear to have arisen from private-sector projects, despite previous representations made by FCPL that they are attributable to government.”
The office said the government had taken plenty of action to support Firm, including time extensions, deferral of liquidated damages, direct payments to subbies and organising deposits for materials.
The Department of Finance provided $2.8 million to 85 Firm subcontractors to cover off invoices following the administration, the creditor’s report showed.
A spokesperson for the Department of Finance said it had provided significant support to the company over the past 12 months and had covered payments to subbies using project bank accounts.
Firm was, however, in arbitration over a private sector dispute with Developwise Group 2 Pty Ltd, according to the creditor’s report.
The builder had been constructing Developwise’s Sanctuary apartment complex in Mount Pleasant but was taken off the job in August.
The developer lodged a $9 million debt claim with the administrators, while Firm listed the apartment developer as a debtor valued at $1.4 million.
Mr Mohen has recommended to creditors that the company be wound up.
His report also said claims against directors for breaches of directors’ duties had been reported to ASIC.
