Construction sector not yet out of the woods

In November 2022, the Reserve Bank of Australia (RBA) wrote about the financial stress and contagion risks in the residential construction sector. The sharp rise in construction input costs, compounded by the shortage of labour and materials, were eroding profit margins on existing fixed-price contracts, the bank stated. At that time, construction company insolvencies had increased sharply, exceeding their pre-pandemic levels and accounting for close to 30% of all company insolvencies, “with further insolvencies likely”, the RBA added.

Fast forward 20 months and the predictions of Australia’s central bank continue to ring true.

The latest Alares Credit Insights report shows to the end of June 2024, insolvencies among licensed building companies were already on par with full-year totals in 2018 and 2019. Patrick Schweizer, Director of Alares, says: “The building and construction industry has been particularly hard hit in 2024. The full-year projection for 2024 is expected to well exceed historical highs.”

Malcolm Howell, Partner, Jirsch Sutherland, says: “It’s fair to say that insolvencies in the building & construction sector still have some way to play out before they ‘normalise’. The pressures outlined by the RBA combined with high interest rates and the cost-of-living crisis are having a major impact.

“Between January and July this year, our firm has handled 60 matters in the building & construction sector, compared with 44 for the same period in 2023 and 78 matters in total over the 12-month period. And it’s not just licensed companies that are being impacted; there’s a real domino effect occurring, and we’re also seeing an increase in smaller subcontractors and suppliers being affected by the financial woes of head contractors and by the state of the economy.”

Avoiding the ATO at your peril

During June, overall insolvencies remained around 50% above historical levels, and according to the Alares report, insolvencies in 2024 are projected to reach an all-time high. Alares states that the number of businesses currently listed with reportable tax debts sits at more than 27,000 (more than $100,000 in tax overdue by more than 90 days without meaningful engagement with the ATO).

“There’s clearly a “catch up” taking place from the COVID years (2020-2022). During these years combined we saw about 8,000 fewer insolvencies than the historical run-rate,” says Schweizer. “This suggests the current increase in insolvencies will continue through the remainder of 2024 and potentially into next year. The key question remains: what will happen once the catch up is complete?”

Howell adds, “Insolvency inquiries will continue to rise as the ATO doubles down, the economic environment puts pressure on sales, and landlords and businesses start collecting debts. Plus, according to the RBA, since late 2022, housing loan arrears have increased steadily from low levels, alongside rising household budget pressures from higher inflation and interest rates. It truly is a perfect storm.”

And it’s not just the ATO putting the clamps on, Howell says. “Credit providers are getting even tougher with recoveries and the big four banks are increasingly taking to the Courts to seek winding-up orders.  Also, it’s not just current directors that are in the ATO firing line. As has been reported recently, even former directors of now-liquidated companies are receiving DPNs because they are liable for unpaid taxes or superannuation contributions. We have seen a significant number of older matters rear their heads many years later, with directors getting a major ‘DPN shock’. That makes the need to act swiftly even more imperative: with a non-lockdown DPN there’s a 21-day window to comply, while with a lockdown DPN, directors are instantly liable. That’s why it is so important to engage with an insolvency specialist immediately.”

Howell warns, “Putting your head in the sand is not an option. DPNs, warning notices and garnishee notices are reaching record levels and that’s pushing more and more businesses into insolvency or having to seek refinancing or restructuring. In June, one-in-five insolvency appointments were Small Business Restructurings, which reinforces its value as way to get a business back on track while addressing legacy debt.”