Construction and Insolvency

CONSTRUCTION AND INSOLVENCY

You cannot open a social media page, a newspaper, turn on your television or log on to a device without seeing another story detailing the current financial impacts affecting the construction industry.  These impacts include, supply delays, price rises, employment issues, fixed price contracts, insolvency!

Without passing commentary on the state of Australian media, financial difficulty in the Construction sector is not new nor uncommon.  Why?  There are a multitude of reasons, but perhaps the most significant one is that Construction is one of the largest industries in Australia, so just by its very nature it will also make up a larger population of the insolvency statistics.

This leads to a question we get most commonly in recent times.  What are you seeing in the Construction sector? Followed by the inevitable, is it as bad as what we are seeing in the media?

The answers are not simple, nor are they one size fits all.

Remember construction includes:

• Sole traders with little to no employees
• Residential builders doing everything from 1 or 2 homes a year through to high volume builders
• Commercial construction sub-contractor companies with little to no employees
• Commercial construction doing massive infrastructure projects usually for Government
• Developers
• And of course, everything in between

Then there are the different structures, licenses, contracts etc.

These variables play a massive role in the impact of the current economic impacts on construction.

For example, pricing impacts on a residential builder with a cost-plus contract will be very different to the impact on a high-volume builder with fixed priced contracts.

So “what are we seeing” is a difficult question when we go on a deeper dive and the follow up of “is it as bad as what the media are saying” are very much case dependent.

However, we can state what we are seeing generally.

The current state of play

Generally, many companies are impacted negatively by the abrupt increases in pricing both for materials and labour inputs. Access to labour is also causing delays which have a negative impact.  This results in companies with large exposure to liquidated damages paying significant overs for labour to avoid such damages.  The result is those employees are drawn from other companies who in turn are now impacted.  Companies with the inability to finance these changes or fail to identify the financing needs are experiencing larger creditor days and their debt with the Australian Taxation Office (“ATO”) is increasing. I.e. the funding is coming from the creditors but more usually the ATO.

In our previous blog we wrote about “Burying your head in the Sand” – sadly, despite all the media, this is still happening.

Which is not uncommon, but odd, in a sector where holding a domestic building license in Victoria is a personal registration with guarantees attached to shortfalls on building insurance policies under the Domestic Building Insurance regime.

Like all companies in financial difficulty, early intervention is key, yet we are still seeing companies coming to us for the first time after the directors have received a “Notice of Director’s Liability to Pay a Penalty to the Commissioner of Taxation” otherwise known as a “Director Penalty Notice” or “DPN”.  Details on dealing with these notices are included in our previous blog.

Currently the ATO is still in a “quasi” collection phase and whilst more active than at any time since the start of the pandemic do not appear to be as active as pre-pandemic levels……….”Yet”.

This is as we lead into Christmas, a notoriously tough time for construction companies which, for the most part, will close and need to fund leave entitlements for the close down period, as well as increased creditor amounts as most companies strive to complete works or stages prior to the close down period.

An even tougher time follows in February when works have recommenced, progress claims or debtor invoices issued in December and January are due for payment.  Yet given the shorter December and January months these amounts are usually significantly lower, placing a cashflow squeeze on companies who because of the increased work levels prior to Christmas have larger than usual creditor claims.

So, the time to act is now, if you are feeling the squeeze or are not 100% sure what tomorrow brings, get in early and understand your options and the impact of each of them.

Options

Not all options require an external formal appointment.  It may be a referral to a specialist tax debt negotiator to deal with your outstanding ATO debt, or an introduction to a financier, a restructuring of your business dealings and cashflow.  This may smooth the cashflow crunch enough to see you through a tough time but ultimately avoiding a formal appointment.

If a formal appointment is required there are many options available, that could see the survival and ongoing viability of the business, including:

• Safe Harbour
• Small Business Restructuring
• Voluntary Administration into a Deed of Company Arrangement
• Liquidation

Which one is right for you? It will come down to your specific circumstances.

Each of these options has different benefits and consequences for its stakeholders.  Again, each company and its solutions will be unique to that company.  Should you want to understand your options in relation to the contents of this blog or any other insolvency related matter, do not hesitate to contact any of the six registered liquidators at Dye & Co. www.dyeco.com.au