Subcontractors in Australia are at risk of not getting paid on time or at all as more construction companies go bust. Just last week, West Australia company, FIRM Construction, went into administration, joining several others in the embattled industry.
More Insolvencies Likely in the Residential Construction Industry
The Reserve Bank of Australia warned that more insolvencies in the residential construction industry are likely due to rising costs. This year alone, large firms such as Probuild, Condev Construction, Pivotal Homes, Waterford Homes, New Sensation Homes, Privium, Home Innovation Builders and Pindan Group have already gone into administration.
According to the RBA, construction company insolvencies have surged dramatically due to several factors, including increasing interest rates that also increased debt-servicing costs for many construction firms. The cost of materials, which has gone up to more than 20 per cent, according to the RBA, supply-chain disruptions, and weather- and illness-related delays, also contributed to the construction firms’ financial stress. All these factors resulted in substantial compression of profit margins for existing fixed-price contracts and builders are now making losses, the RBA noted.
“While the direct implications for the financial system are limited because banks have very small exposures to builders, there is potential for financial stress to spread to other businesses within the broader construction industry and to some households,” the RBA said.
In FIRM’s case, the company was turning over nearly $100 million per annum just two years ago but “the business has failed to pull through the financial challenges of 2022,” according to its director, Mark O’Gorman. FIRM has been in operation for 20 years and has an $80 million portfolio of properties mid-construction across Perth.
According to news.com.au, FIRM was stripped of the contract to build a school days before it went into administration over fears it would not be ready for the 2023 school year, for which subcontractors are reported to be owed hundreds of thousands of dollars.
Subcontractors: Forgotten Victims in Construction Industry
“Paying our staff and sub-contractors while continuing to deliver the projects we have committed to has been our focus and priority,” WA Today quoted Mr O’Gorman as saying.
While FIRM said they have ensured most of their subcontractors are protected by the use of Project Bank Accounts – on both their public and private sector projects – subcontractors, in general, are the ones who bear the brunt of the domino effect of the insolvency of major construction companies. Not to mention that even when construction companies are not in administration, subcontractors are the number 1 victim of the systemic late payments that plague the construction industry.
Small businesses, including most subcontractors, get paid more than 120 days by big businesses, according to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). Using data from the Payment Times Reporting Regulator, the ASBFEO said that big businesses in the manufacturing, retail trade, and construction sectors recorded the worst payment performance, with only 22% of big businesses paying small businesses within the 30-day payment goal set by the Business Council of Australia.
The nation’s subcontractors are in crisis, according to the National Electrical and Communication Association (NECA). “Subbies are taking on a disproportionate amount of risk on construction projects,” Oliver Judd of NECA said.
Subcontractors Should Get Their Debts Paid ASAP
Subcontractors must endeavour to have their debts paid immediately lest they won’t be prioritized when the contractor has folded. It’s not impossible to recover debts from an insolvent company but there is no guarantee of a 100% recovery as there will also be other creditors who will be lining up to get paid.
“It is important for Subcontractors to get their debts paid by applying pressure through Debt Recovery and threatening Credit Default.”Liam White, Slater Byrne Recoveries’ national head of sales
The longer subcontractors wait to collect their debts, the more at risk they are of not getting paid. At Slater Byrne Recoveries, aside from the usual calls and emails, we conduct debt collection for our subcontractor clients differently. For one, we encourage our clients to take advantage of the Building Industry Fairness (Security of Payment) Act 2017, which was specifically passed to law to help companies in the building and construction industry get paid on time.
We also tell our clients not to wait until their debtor is insolvent before they follow up on unpaid amounts. Acting quickly in chasing unpaid debts reduces a subcontractor’s risk of not getting paid.
Liam White joined the Slater Byrne Recoveries team in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently National Head of Sales at Slater Byrne Recoveries.