Subcontractors and suppliers are being told to prepare for further shocks following the collapse of industry giants Probuild and Condev.
As Condev co-founder Tracy Marais tearfully bid her business farewell this week, she warned other companies would soon follow.
“I don’t think potentially, I think for sure,” Ms Marais said.
Experts have described a “perfect storm” of rising materials costs, Covid-19 delays and disruptions to supply and labour markets putting pressure on the industry.
However, they say there are early warning signs to look out for that could help signal which companies will be next.
Developers taking over some of Condev’s projects have indicated they will honour existing contracts, which is good news for some, but will not always be the case.
When such a collapse occurs, subcontractors and suppliers are at high risk of being left out of pocket.
Head of Product and Rating Services at global rating firm Equifax, Brad Walters, said being at the “coal face” of the construction industry meant subcontractors were at risk from issues at every link in the supply chain.
“It’s a tough season, and unfortunately subcontractors, which represent one of the unsecured creditors when there is a collapse, are left unfortunately highly exposed,” he said.
“The data shows that more than nine out of 10 unsecured creditors get nothing back.”
Subbies can protect themselves in the lead up to a collapse by recognising the early warning signs, Mr Walters said.
Signs a business could be in trouble and heading for insolvency include the departure of key managerial figures, delayed payments, project delays and key personnel with a history of adverse outcomes.
There are also a number of harder to spot issues such as trading losses, poor management or governance practices and thinly capitalised business structures.
Founder of representative group Subbies United, John Goddard, said in the current environment subcontractors were playing “Russian roulette”.
“In the building industry you can be working for the biggest one that’s been around for 20 years, like Condev, and within days they’re gone,” Mr Goddard said.
“You’ve just got to be so observant.”
Mr Goddard said to read contracts carefully – with legal advice if necessary – and be willing to negotiate terms.
“Read your contracts, understand them, get rid of clauses you don’t like, and if they still won’t sign it, don’t go with them. It’s not worth the hassle,” he said.
However, even under contract, “that’s not going to save you if the builder’s got no money,” he added.
Mr Walters suggested subcontractors tap into market insights and rating schemes to gauge companies as well as their key trading partners for any risk.
“There are a lot of very clear early warning signs that are there,” Mr Walters said.
“Subcontractors probably are focused on what they do best, so should ensure they are empowering themselves with the insights from the market.”
A voluntary rating tool, set to launch at the end of this month and developed by Equifax with backing by the NSW Government, aims to greatly improve transparency and restore confidence in the industry.
The independent construction industry ratings tool (iCIRT) was primarily born off the back of issues within NSW’s high rise apartment sector – but also provides an indication for subcontractors of where companies may be headed.
“Ratings will paint a clearer picture of a developer’s trustworthiness and the predictability of whether they are likely to construct a compliant and safe building and have the capacity to fix issues if they do arise in the future,” NSW Better Regulation Minister, Kevin Anderson said last year.
Companies are encouraged to come forward and be rated, and to share that information publicly on their websites.
Mr Anderson said those with a strong track record will “reap the benefits”.
Data points used within the iCIRT showed that former construction giant Probuild was exhibiting higher risk attributes before it fell into administration last month.
The company’s rating deteriorated from 2.5 stars in October 2019xjmtzyw, down to 2 stars by December 2020 and was only at 1 star in November of last year.
Mr Walters said there is interest in other states, as well as in New Zealand to develop similar rating tools.
“Increasingly, what you will see is a growing divide between the rated and trusted cohort – and those that continue to operate in the shadow.”
