Businesses Under Threat

The Australian construction industry is facing tough times ahead, with a rise in insolvencies due to the increasing costs of materials, labour, and financing. According to the Australian Securities and Investments Commission, the number of liquidations, receiverships, and administrations in the sector has risen to 1,236 for the year to date, just 48 short of last year’s total of 1,284. This trend is expected to continue for another 6 to 12 months, as the higher costs leave builders and contractors unable to claw back sufficient escalation costs.

About half the construction businesses going insolvent had asset deficiencies – or liabilities exceeding assets – of $500,000.00, which creates risks for other companies down the chain. 9 out of 10 unsecured creditors get nothing back, and the situation is expected to worsen as stresses across the residential and commercial construction chains continue to rise.

The latest large corporate collapse is that of Melbourne-based developer Longriver, which completed large commercial projects in Melbourne, including the country’s tallest prefabricated tower. Longriver defaulted on payments to its builder and other service providers on a $155 million hotel development in central Melbourne, prompting non-bank lender Merricks Capital to appoint administrators to the project. Rising rates and falling land values are expected to prompt some developers to give up sites they had bought.

In this climate, businesses must ensure they have measures in place to protect themselves against payment defaults and other risks. This may include conducting due diligence on potential customers (including head contractors) and keeping a close eye on payment terms and conditions.

As the construction industry in Australia continues to face challenges, it is important to take the following proactive steps to protect your business:

1. Reviewing your finances

Review your financials regularly and assess your cash flow and profit margins to ensure that you are not taking on excessive debt or exposing yourself to undue financial risk. Speak to the team at Constructive Legal Solutions, they can assist by having someone on the ground with you guiding you through this!

a. If the Security of Payments Act applies to you, this is a great read to help you manage getting paid on time. Click here to read more.

b. You can also get some great insight on how to manage debt recovery in times of crisis here 

c. Lastly, know your rights when it comes to unfair preferential claims here and here

2. Reviewing your contracts

Ensure that you have comprehensive and up-to-date contracts in place with your clients that includes provisions for potential cost escalations and delays caused by material or labour shortages. The contract should also clearly outline the rights and obligations of each party in the event of a dispute or breach of contract and payment terms.

3. Insuring your business

Check you have adequate insurance coverage to protect yourself against potential legal claims or liabilities arising from your work. This may include professional liability insurance, workers’ compensation insurance, and general liability insurance. You may even want to consider getting credit insurance! Remember your business may have grown or downsized since getting your insurance policies, it is important to continually update these to reflect your current position.

4. Seeking professional advice

It is important to seek professional advice from the experts in the industry. They can provide guidance on managing cash flow, protecting your assets, minimising your risk, and keep you up to date with new regulations and changes taking place that affect you and your business.

You can better position yourself to navigate the challenges facing the industry and ensure your business remains viable and profitable; and if you need further assistance, the team at Constructive Legal Solutions is here to assist. Call 1300 972 092 or send your enquiry to admin@constructivelegalsolutions.com.au for tailored advice.