The building and construction industry is notorious for falling on hard times. Insolvency statistics from the Australian Securities and Investments Commission (ASIC) highlight just how often failures occur in the industry. On average, more than 20% of Australian companies that report external administrations fall within the building and construction industry.

According to ASIC’s statistics, here are the main reasons companies in the construction industry  failed in the 2014 financial year:

  • Inadequate cash flow or high cash use (18.61%)
  • Poor strategic management of business (16.60%)
  • Trading losses (12.99%)
  • Poor financial control, including lack of records (12.28%)

The statistics aren’t just numbers on a page. They also reflect our findings from our appointments with companies in this industry.

The thing is, the causes can often be mitigated (if not managed) by:

  • Getting accurate and timely advice from qualified professionals (such as your accountant or lawyer)
  • Keeping lines of communication with contractors and subcontractors open about monies coming in and out of your business
  • Maintaining accurate records, and ensuring financial and non-financial results are closely monitored
  • Proactively addressing matters that could have a significant impact on your business.

Government initiatives

Given these alarming statistics, the Australian Senate has referred an inquiry into insolvency in the Australian construction industry to the Senate Economics References Committee. The report, due by 11 November 2015, will focus on:

  • What causes insolvency in the construction industry
  • How much money is lost by secured and unsecured creditors in the construction industry
  • The economic and social effects of insolvency in the construction industry
  • A review of ‘phoenix’ activity in the industry, and whether there’s adequate legal and regulatory protection against it
  • Reviewing the current legal and regulatory framework to protect against insolvency in the construction industry.

Key industry stakeholders have made submissions in relation to the inquiry.

Other key developments include:

  • Proposed amendments to the security of payments legislation, where head contractors of large building projects need to establish trust accounts for depositing retention monies (which need to be audited annually)
  • Increased investigative powers for compliance officers.

What this means for you

Clearly the Australian Government wants to address the prevalence of insolvency in the construction industry. And that can only be a good thing.

But if you’re a Director of a company in the construction industry, you still need to stay vigilant and look for any signs your business is struggling. If you don’t, you may be in breach of your duties under the Corporations Act. (Not sure if your company is in trouble? Check out our insolvency checklist.)

When it comes to insolvency, it’s always better to be proactive rather than reactive. But to do that you need the right advice. So if you think your company (or the company of one of your clients) might be in trouble, contact us for a free consultation to discuss the situation.