It’s a challenging time for the construction industry, thanks to ongoing labour shortages, and supply chain issues, in tandem with rising inflation levels increasing local business expenses. With the high risk of insolvency hanging overhead, taking advantage of an underutilised process – the lodgment of payment defaults – may offer business owners protection and peace of mind.
Increased risk of insolvency throughout the construction industry
The construction sector has experienced substantial, sustained pressures since the COVID-19 pandemic hit Australian shores in 2020.
Global supply chain issues, affected by pandemic-related factory closures and transport restrictions, mean the flow of building materials has been significantly reduced. Even when already-scarce materials, such as timber, are located, they’ve been accompanied by excessive price hikes of up to 40 per cent.
Further, ongoing labour shortages are causing major delays in project delivery, and domestic inflation rates are driving prices up independently. The upward pressure on outgoings has increased rates of insolvency and external administration to an alarming degree. This is particularly noticeable from construction companies offering fixed price contracts.
In terms of residential construction, the numerous government incentives available during the pandemic, such as HomeBuilder, saw 130,000 new homes or renovations subsidised by federal government stimulus programs. As such, there was a corresponding surge in demand. When this increase in demand met an industry facing a severe reduction of supply of materials and skilled labour, as well as rising costs, it created a perfect storm of insolvency risk.
To illustrate, two major Australian construction companies, Condev and Probuild, went into liquidation earlier this year. Further, one of the display home giants, Metricon, announced a restructure in the first week of August 2022, citing the economic impacts of these costly trading conditions. This process is set to impact nine per cent of its 2,500+ strong workforce, significantly affecting their livelihood and security. Finally,a Geelong-based building company that collapsed in March 2022, Norris Construction Group, has been revealed to owe almost $30 million in debt (and millions more to staff).
Stories of insolvency, in which millions of dollars are left outstanding to customers and suppliers, are not uncommon throughout this sector. Outsourced, skilled third-parties are the backbone of the industry, with 80-85 per cent of all construction work in Australia said to be performed by subcontractors. When a subcontractor’s business collapses with debts owing to your company, you may be exposed to holes in your revenue, stagnant cash flow, and an inability to complete contracted projects. When the entire sector is facing unprecedented economic pressures, the risk of domino insolvency across contracted businesses increases.
Lodge payment defaults to mitigate insolvency risks
A payment default is a black mark on a business credit report. It details if any partner business has not paid its invoices, and may stay on that company’s credit history for up to five years.
CreditorWatch research indicates that nine out of ten (91 per cent) of businesses will avoid working with a company that has a history of payment default. As part of an effective credit risk management strategy, if you know ahead of time that a business has a payment default on its credit report, you may know to avoid engaging with them.
The power of payment defaults – Registering a payment default offers key benefits to a business in the construction industry. Firstly, registering a payment default when a debtor fails to pay its bills warns others in the industry that engaging with that business may be risky. This can help businesses watch out for each other during these challenging times. Further, it can prompt debtors to pay their debts faster, and may lead to quicker debt collection, minimising bad debt.
As part of CreditorWatch’s extensive suite of debt collection tools, businesses in the construction industry are able to easily lodge a payment default through our platform. As a credit bureau, debtors are put on CreditorWatch’s bad debt register. Not only are you protecting other businesses from working with debtors, but you can utilise the bad debt register as part of your credit risk management strategy. Simply look up prospective clients or suppliers, and if they appear you may avoid working with these riskier businesses to begin with.
Utilising credit reports – Another pillar in the foundation of effective business debt management is the performing of credit checks on prospective contractors and third party suppliers. CreditorWatch offers customers clear and concise credit reports that showcase the level of credit risk another company may pose to your business. Sourced from comprehensive public and private data sources, a credit report can show you if a business has a history of poor payment behaviour that may be repeated with you.
Monitoring payment behaviour – In an industry as volatile as construction currently is, the success of your business may depend on diligent monitoring of your client and supplier payment behaviour. This is one of the quickest ways to discover if a third party is struggling with cash flow issues that could result in unpaid invoices to your business.
1. Monitoring your existing customers – CreditorWatch provides 24/7 monitoring and alerts concerning adverse payment behaviour from your subcontractors. Our tracking tools constantly review customer payment activity, so you’ll get real-time alerts when important information changes, such as court action against them or voluntary administrations. By monitoring payment behaviour, you gain peace of mind that any adverse events will be immediately transparent, meaning your business is not left in the dark with unpaid invoices and poor cash flow.
2. Monitoring potential customers – CreditorWatch’s Payment Predictor tool analyses a company’s payment history, including the average number of days it takes to pay its bills. This can then be compared to the industry average, so you can avoid slow paying businesses. Additionally, CreditorWatch’s DebtorLogic tool does the hard work for you and identifies high-risk debtors and customers with poor payment behaviour. DebtorLogic assesses company payment trends to provide you with a data-driven analysis on the likelihood a business would pay an outstanding amount.
Working together, these debt management tools could help to vet whether a subcontractor or supplier has bad debts, and illustrate the likelihood that they may pay your invoices on time. With this knowledge, your business can make a more informed decision about engaging with a client at credit risk before their poor payment behaviour is repeated with you.
Contact us today to hear more about how our suite of digital credit tools can help you protect and grow your business.
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