Which side of the construction boom are your customers on? What suppliers and credit teams should watch

Australia’s data centre pipeline is creating significant opportunities for the construction sector. However, for businesses extending credit into construction, strong investment doesn’t mean every customer carries the same level of risk.

Australia’s data centre boom is gathering pace. More than $150 billion worth of projects are in the development pipeline, creating opportunities across commercial construction, electrical contracting, mechanical services, civil works, engineering, and specialist suppliers.

For a construction industry that has faced significant pressure in recent years, that investment is welcome. However, the benefits are unlikely to be shared evenly.

Large commercial builders and specialist contractors positioned to participate in data centre projects may benefit from increased demand. At the same time, competition for skilled labour and materials could increase pressure elsewhere in the sector, particularly among residential and less-capitalised construction businesses.

For businesses extending trade credit into construction, this creates an important question. Which of your customers are positioned to benefit from the boom, and which could be coming under increasing financial pressure?

Your construction customer book could be moving in two directions

The headline growth story only tells part of the picture.

Some customers may be well positioned to benefit from years of high-value data centre work. Others may face greater competition for skilled labour and materials, adding to existing cost, capacity, and cash flow pressures.

Even growth can change a business’s credit profile. A contractor taking on more work may place larger orders or require more credit, increasing a supplier’s exposure at the same time as its working capital requirements grow.

This means two construction customers in the same broader market could experience very different financial conditions.

For suppliers, wholesalers, manufacturers, and other businesses extending trade credit into the sector, the challenge is therefore not simply determining whether construction is growing. It is understanding how changing conditions are affecting the individual businesses in their customer portfolio.

CreditorWatch’s latest Business Risk Index (BRI) shows why looking beneath the construction growth story matters.

Construction businesses recorded a 60-plus-day arrears rate of 6.5% in August, up 13.3% compared with a year earlier. The sector’s trade payment default rate was 1.94%, while its ATO tax default rate was 1.58%.

Construction first-time insolvencies rose from less than 300 in July to 868 in August, mostly because of the Bathla collapse, highlighting the level of financial pressure already present across the sector.

Payment behaviour can reveal pressure earlier

Insolvency is one of the clearest indications that a business has experienced serious financial distress. However, by the time insolvency occurs, financial distress is already well advanced.

Payment behaviour can provide earlier indications that circumstances may be changing.

CreditorWatch's BRI analysis shows that businesses with four or more registered trade payment defaults have an insolvency rate of around 19%. For businesses with no registered payment defaults, the insolvency rate is well below 1%.

A payment default does not mean a customer will become insolvent. However, the relationship highlights why changes in payment behaviour deserve attention.

This is particularly relevant as the construction market becomes more uneven.

Headline construction figures can tell credit teams where investment is flowing. Insolvency figures can tell them where businesses have already failed. Neither, on its own, answers the more immediate question facing a supplier: is the risk profile of the businesses we extend credit to changing?

Payment behaviour can add another layer to that picture, helping credit teams identify signs of financial pressure before they become visible through formal insolvency.

So, which side of the boom are your customers on?

There is no single indicator that can predict how an individual construction business will perform. However, changing market conditions make it increasingly important for credit teams to maintain a current view of the businesses they extend credit to.

Three questions worth asking

Don’t wait until the answer is obvious

The data centre boom could create significant opportunities across Australian construction. It could also increase the divide between businesses positioned to benefit from that investment and those absorbing greater cost and capacity pressures.

For businesses extending credit into the sector, the challenge is identifying meaningful changes in individual customer risk early enough to review your exposure and make informed credit decisions.

By the time insolvency provides a definitive signal of financial distress, you may already have significant credit outstanding.

That is why an ongoing view of customer risk matters.

Get a clearer view of changing customer risk

Market conditions can change quickly, and so can your customers' circumstances. CreditorWatch helps credit teams monitor changes in credit risk and payment behaviour throughout the customer relationship.