As cracks begin to emerge in the Australian construction industry, various credit risk factors are posing a huge threat to its entire foundation.

With supply chain issues, labour shortages, soaring interest rates and inflation ravaging the Australian economy, businesses are feeling the pinch in this post-pandemic world, especially those in the construction industry. Added cost rises have exacerbated the challenges for the sector, affecting both demand and supply.

In terms of demand, COVID-19 triggered a boom in domestic renovations, with the Australian Bureau of Statistics (ABS) revealing that Australians spent $12.3 billion on renovating their homes in 2021, up 33 per cent from 2020. In terms of supply, global disruptions and rising costs are adding significant pressures on major building developers through to smaller sub-contractors.

Supply disruptions and cost rises are having a massive impact on the availability of building materials, transport, storage, utilities, and labour. This has placed an enormous strain on a sector already operating within thin margins, with about 12 per cent of construction businesses more than 60 days in arrears on their payment to suppliers.

Not only that, but with industry giants like Probuild falling into voluntary administration, this could lead to a domino effect throughout the sector – creating shockwaves felt from the top down.

So what can be done to control the situation? Obviously, matters of war, the global pandemic and interest rates are out of the hands of developers and contractors – but there are strategies that can be implemented to help mitigate risk of bad debt and total financial collapse.

In this article, we explore what can go wrong with risky credit behaviour, and outline the different approaches businesses can take to avoid such risks. We explain why it’s important to generate a company credit report and run a construction company credit check, Australia-wide, on other businesses to avoid risky relationships.

Red flags in the construction industry

As mentioned earlier, the downfall of Probuild was a devastating blow for many in the industry, with CreditorWatch CEO Patrick Coghlan expressing that it was just “the tip of the iceberg”.

CreditorWatch had predicted Probuild’s collapse, having given them a RiskScore of D1 in October 2021, indicating that its risk of default or insolvency was significantly higher than its industry average. This was attributed to its deteriorating payment behaviour, lack of credit monitoring, and amplified credit risk in the construction industry.

CreditorWatch’s RiskScore uses sophisticated machine learning technology which analyses multiple subsets of unique data. It accurately assesses a business’ creditworthiness and their likelihood to default in the next 12 months, by looking beyond high-risk events and factoring in unique information such as geographic risk and trade payment data.

Mitigating risks with construction business credit checks 

To protect themselves, every party — from subcontractor to project owner — should conduct their own due diligence and run company credit checks on a business or entity to ensure that they’re financially stable. Having an acute awareness of the entities you work with and the risks associated with them is key to avoiding future losses.

A credit report is a great way to ensure that you’re doing business with credible partners that will be able to pay their bills and complete their projects. It is important to understand the financial stability and credit risk of each entity in the payment chain from developers, to project owners, construction managers, subcontractors, material suppliers, equipment lessors and more. This will help construction businesses ensure that their projects and money flow in and out smoothly.

Otherwise, businesses will be facing issues like delayed payments – a major red flag in a fragile industry already struggling with bad debt. It’s important to check company credit for your clients, suppliers and contractors, to ensure you minimise your risk of payment defaults and bad debt.

CreditorWatch’s Business Credit Report provides you with everything you need to manage credit risk. To rule out any potential risks, a credit check should be carried out on all your trading partners, especially those with whom you share long-standing relationships.

CreditorWatch tools for gold standard due diligence

CreditorWatch business credit check reports reveal the level of credit risk of any commercial entity, and allow you to make more informed decisions about who to do business with, before contracts are signed.

Our credit reports contain the entity’s RiskScore and Payment Rating. Payment Rating is designed to expose slow-paying businesses by scanning business-to-business transactions, and measuring the time it takes for companies to pay their bills. With these valuable insights, our customers gain a clearer understanding about their debtors’ abilities to pay on time.

In this volatile economy, business circumstances can change rapidly. This is particularly true for the construction industry. Staying on top of your suppliers, subcontractors, and debtors is key to avoiding any potential financial troubles. CreditorWatch’s monitoring and alerts track your customers’ activity 24/7 and notifies you about important updates like court actions, voluntary administrations or non-payments to other suppliers. This empowers you to act quickly to mitigate potential risks.

Just knowing whether a partner can pay or not may not always be enough when it comes to making important business decisions. That’s why CreditorWatch also provides an in-depth assessment about the financial health of your trading partners. Our Financial Risk Assessment provides a comprehensive look into the financial viability of your trading partners, to help you make better procurement and trade credit decisions. This is particularly useful to mitigate risk when dealing with large credit limits, critical supplier contracts or sizable tenders. 

CreditorWatch helps construction businesses mitigate credit risk

CreditorWatch works with many of Australia’s top construction businesses. Our suite of innovative tools run comprehensive business credit checks to help reduce your credit risk and protect your cash flow. Contact us now for a free personalised demo.