By Shivendra Kumar, Principal Consultant, Shivendra and Co
In March of this year, Canberra-based PBS Building joined a growing number of major Australian construction companies that have collapsed – yet another sign that the industry needs to reform.
In a joint statement on March 7, PBS announced the decision to put its New South Wales, Australian Capital Territory and Queensland construction businesses into voluntary administration.
Company founder, Ian Carter, pointed to the challenges of material costs, fixed price contracts, labour and material shortages, extreme weather events and wars.
"We are the latest, but we won't be the last construction group to buckle under the weight of a broken industry and way of doing business that needs urgent reform," Mr Carter said.
Unfortunately, as someone who has made this industry my career for over two decades, I know Mr Carter is right.
PBS is just one of many who have fallen in the past twelve months, alongside companies such as Melbourne-based Interface Constructions Victoria – which entered external administration in early May.
Construction industry insolvencies have reached their highest levels in almost a decade, with recent figures from ASIC showing companies going into external administration for the first time hit 1672, with 71 of those occurring in April.
While residential builders dominate the list, there are dark clouds over the civil and infrastructure sector. According to data and analytics company Equifax, in Q1 for FY23, the residential sector saw a 33 per cent downgrade of credit rating, followed by 32 per cent for commercial builders and 23 per cent for the civil and infrastructure construction businesses.
With these indicators, the industry must reform now or more businesses will suffer a similar fate.
What needs to change
First and foremost, construction companies should not be treated like banks.
In a statement last year, Australian Constructors Association CEO, Jon Davies, said the industry has essentially had to bankroll projects on behalf of clients.
"Construction is one of the few industries operating under a cash negative payment regime where work is undertaken for third parties without payment until after materials have been ordered and fixed to site," Mr Davies said.
"Airbus requires 20 per cent of the capital costs to be paid upfront before manufacture of a new plane and with a price tag of US$445 million – this is an investment that is comparable to a mid-range construction project.
"Construction projects are no different to any other significant purchase and should be financed through institutions that are appropriately set up to do this."
In conversations I have with subcontractors, the biggest challenge they manage is cash. There is unanimous agreement that better payment terms will be an enabler – many hesitate in recruiting capable people, investing in technology and equipment as they fear they won't be able to fund these areas long term.
Clients have a big role to play
Governments must be transparent and encourage transparency on how project costs are allocated and what value head contractors 'create' versus value subcontractors – who perform the work – create.
Clients must relook at how they pay contractors and work in the best interests of the industry and not their own.
I discussed these issues previously in an interview with CEO of Civil Contractors Federation New South Wales (CCF NSW), David Castledine, and it's worth repeating his thoughts on the issue here.
"In late 2021, CCF New South Wales undertook a survey of members to which 35 per cent responded. It found that 30 per cent of respondents – contractors – lost money. 25 per cent of that group made less than five per cent in profit. We're seeing wafer-thin margins," Mr Castledine said.
"In that 2021 survey, 40 per cent of our respondents had a decrease in revenue compared to 2018 and 16 per cent of them had cuts in revenue growth. That's not a picture that's synonymous with an infrastructure boom."
I agree head contractors are not charities or not-for-profit organisations, but the same goes for subcontractors.
How can the industry drive accountability, especially when it comes to nation-building projects?
One way forward is to develop an industry index which tracks value created in the field, versus overall value of the project.
Similarly, the role clients play when businesses are involved needs to be assessed and reported.
A pipeline of work leads to long-term success
An extended pipeline of work means businesses can invest in automation, technology, equipment and people, which enhances productivity and profitability consequently.
The industry currently invests on its own, with the uncertainty of current project performance and uncertainty of a pipeline, keeping them one decision away from success or failure.
Imagine awarding ten individual bridges over ten years or a major project with multiple smaller work packages over a few years to a group of construction companies – such an approach will enable investment in people, equipment, materials, methods, systems and even R&D.
Over time, investment in these areas makes business more viable, improves efficiency, reduces costs and scheduled overruns, and possibly keeps the cost of constructing infrastructure steady over longer periods.
Acknowledge what you don't know
Lot of construction businesses are built on technical know-how and not on business know-how.
Important fundamentals are often overlooked by business owners and non-technical expertise isn't given sufficient value until a problem hits. There is inadequate attention on business plans, strategy, definition of business processes, alignment of roles and methodology behind investments.
While the above isn't the primary reason why the big names fall, it definitely has an impact, we just don't hear about it. Business owners need to engage the right expertise to help them build their business, just as they are engaged in the expertise areas of their business, and give it the necessary attention.
Otherwise, the same mistakes keep repeating.
Look at the urgency to meet tender or delivery deadlines versus the number of times a strategy review or a forecasting meeting is rescheduled.
Successful organisations, mainly outside of construction, have good vision, execute their strategy well and maintain rigid processes and methods throughout their growth periods. With challenges the construction industry deals with, these elements become more important.
For businesses that have struggled or even collapsed, their problems can be traced back to long before they ran out of cash. Most likely it started with lack of fundamentals such as capability development, risk management, business plans, decision-making hierarchies, recruitment and the absence of process controls in the formative years of business.
Expertise and guidance is available. Engaging the help of experts who can provide support for business fundamentals will be less painful than dealing with liquidators down the track.
From my own experience of helping growing businesses, these fundamentals have provided business owners and leaders with clarity, helped them identify and avoid risky opportunities, recruit the right resources and most importantly, create a positive culture that delivers business outcomes sustainably.
More insolvencies are expected, so businesses should take heed of what's happening and turn their attention to creating an ecosystem of contractors and subcontractors working together to build Australia's future. Opportunities exist – it's what the industry, from the client to the supplier or subcontractor at the end of the value chain, decides to make of it.
Key Facts:
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