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Winter 2022 ACROSS THE TRADES
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“Unfortunately, when it comes to the
issue of non-payment, construction’s
large-scale problems are very much
prevalent,” he says.
“Thousands of subcontractors have
been forced into insolvency due to the
‘domino effect’ of bad debt down the
line when building and construction
companies fail to pay. By the end of
2021, employment in the construction
industry is projected to fall by
approximately 3.6%, and the fear is that
the current climate is only exacerbating
this.”
Nelson says that coupled with
the challenge of properly and fairly
allocating risk, the construction
sector, which is already one of the most
heavily litigated sectors, is likely to
see an increase in principals turning
to onerous provisions in construction
contracts to ‘prevent’ delay.
“The result will be many projects
likely to overrun, which may trigger
contractual defaults at all levels of
the contracting chain, adding pain to
already squeezed bottom lines and
working capital reserves,” he says.
The point to five specific challenges
facing the construction sector:
1. inflation, particularly following the
rise in prices of raw materials due to a
lack of supply;
2. labour shortages and unskilled labour
as a result of lockdowns and closed
borders;
3. finance and cash-flow;
4. contractors and subcontractors
entering into contracts without proper
consideration of risk allocation; and
5. contractors and subcontractors
entering into unfair/one-sided
contracts in order to start a business
relationship, which can result in
potential legal proceedings.
The warning signs
In an environment of multiple and
potentially diversified projects, spotting
the signs that a construction company
is struggling may not always be
apparent.
“Monitoring project performance
from tender to hand-over is essential
in a time where many factors that are
outside of a business’s control can
impact a project’s financial success,”
Andrew adds.
Some warning signs to look out for
include:
∫
any slowdown or delays in projects or
deadlines that have lapsed;
∫
delays in payments to subcontractors
or others in the
supply chain;
∫
subcontractors
refusing to go on-
site;
∫
lack of contractor
education and
legal advice –
contractors and
subcontractors to
readily accepting
onerous terms.
“These signs
indicate a company
is struggling with
its cash-flow and
it’s important to
recognise them and take early action,”
Andrew explains.
“While the ATO has taken a
compassionate approach to its debt
collection efforts during the past 19
months, that won’t be the case forever.
In fact, the ATO is already starting to
send letters to businesses that are
behind in their tax.”
In circumstances where accrued
liabilities, such as tax debt, are
becoming apparent on a company’s
balance sheet, further questions around
project profitability
and pipeline
forecasts are the next
investigative step.
“Often we see
companies in this
industry fall behind
due to one or two
projects that overrun
on costs and/or
timing, with the
losses eroding all
working capital and
creating a proverbial
‘rob Peter to pay Paul’
scenario,” Andrew
says.
“Identifying a
potential problem early expands the
options available for the business,
ensuring that any financial contagion
does not spread further than
necessary.”
The construction sector is likely to see an increase in principals turning to
onerous provisions in construction contracts to ‘prevent’ delay.
“Identifying a
potential problem
early expands the
options available
for the business,
ensuring that any
financial contagion
does not spread
further than
necessary.”