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Probuild collapse; involvement in tragedies like this can be avoided

Man standing in front of an Australian construction site.

Following the news that the Australian construction giant Probuild has fallen into voluntary administration, leading credit reporting agency CreditorWatch assesses the warning signs that existed in advance of the collapse and how they could have been avoided.

“This news comes as a devastating hit to the Australian construction sector,” says CreditorWatch CEO Patrick Coghlan from Sydney – NSW, “the demise of a business with the scale and reach of Probuild is bound to send shockwaves through the industry, as thousands of small businesses are impacted. Sadly, I fear this is the tip of the iceberg, and we could see many more going under, as an industry that was already under significant pressure is dealt another heavy blow.”

 

Red flags in plain sight for industry partners

The writing was on the wall for Probuild which, like the rest of the Australian construction industry, struggled to survive a perfect COVID storm of supply chain disruptions, cost blowouts, and increased worker absenteeism.

CreditorWatch rated Probuild a D1 High credit risk Rating in October 2021, with its risk of default or insolvency significantly higher than the average Australian business, and well above the industry average. This rating dropped significantly due to a few key factors including deteriorating payment behaviour, adverse credit activity, and amplified credit risk in the construction industry.

The CreditorWatch RiskScore uses sophisticated machine learning technology and multiple subsets of unique data to assess a business’ creditworthiness and predict their likelihood of default in the next 12 months. When assessing credit risk, it’s essential for businesses to look beyond high-risk events such as director bankruptcies so they can assess a broader range of factors such as trade payments data, location, and geographic risk.

“The data underlines just how crucial it is for businesses to monitor the vital signs of their stakeholders and to identify those suppliers and debtors that could be at risk of default, in order to adequately assess their credit risk,” continues Coghlan.

Probuild’s average invoice payment time also increased substantially in 2021, rising from just under 28 days in March 2021 to 58 days in February 2022. This spike clearly contrasts with the wider industry, which experienced significant challenges throughout the pandemic but maintained an average repayment time of 7 days in both 2021 and early 2022.

Another red flag was a court action lodged against Probuild in October. This marked Probuild as ‘high risk’ on CreditorWatch.

Another red flag was a court action lodged against Probuild in October. This marked Probuild as ‘high risk’ on CreditorWatch.

Ginette Muller, General Manager, Advisory Services Australia commented: “The fundamental reasons for failure are the same as they always are; albeit some, but certainly not all, blame can be attributed to COVID. The usual reasons are undercapitalisation and underquoting with both labour and supplies. Add to those this time the supply chain going to hell in a handbasket.”

 
Will the fall of Probuild cause a construction administration avalanche?

Probuild is the largest casualty of the Australian construction industry but is not the first major construction business to fall in 2022. Melbourne-based (Victoria -VIC) ABD Group went into liquidation with creditors believed to be owed $50-$80 million. Brisbane-based (Queensland – QLD) Privium also went into voluntary administration with estimated debits of $28 million. Prior to collapse, both companies had CreditorWatch RiskScore Ratings of D2 and D1 respectively.

The collapse of three major players since the start of 2022 aligns with findings from CreditorWatch’s January Business Risk Index, which found the number of businesses with the largest proportion of payment in arrears by 60 days or more belonged to the Australian construction industry at 12.4%.

 
Is this just the tip of the iceberg for the construction industry?

The Australian construction industry has been particularly hard hit by the pandemic and is consistently flagged by CreditorWatch data as one of the industries at greatest risk of default. Data from February’s Business Risk Index showed that Construction was the worst offender for payment arrears, with 12.4% of businesses in this sector in arrears of 60+ days, driven by the industry’s unique payment structures which are contributing to a high rate of arrears.

According to James Flaherty, Convenor at Insolve, Insolvency practitioners are saying that “the Probuild collapse shows we are past the ‘canary in the coal mine’ stage of impending trouble in the sector. There will not only be a knock-on effect from other businesses being taken down by this collapse, but it’s also indicative of a broader problem in the Australian construction industry.”

CreditorWatch Chief Economist Harley Dale commented: “The Australian construction industry was arguably facing tough times before COVID, with the pandemic exacerbating those existing pressures. Companies were stretched in 2018/19 and over 2019/20, and then 2020/21 blew things out of the water. That situation persists today.

“There’s no doubt a great number of commercial construction companies are under the hammer right now and what happened to Probuild has an adverse impact on confidence and on the ability of businesses to access any required additional finance, which is likely to become a prominent issue in 2022.

“What Probuild reminds us is that the ‘new world’ 2022 doesn’t work for businesses with legacy issues, and what is happening to Probuild may be a portend for darker times ahead for the commercial construction industry.”

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Bridget
Communications & Marketing Coordinator
Bridget joined CreditorWatch as Coordinator of Communications and Marketing in June 2021. She is passionate about developing and communicating content that assists businesses of all sizes to be supported and protected to grow.
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