It seems that you can’t pick up a local newspaper these days without reading about another builder gone bust in the Queensland construction industry.
Builder insolvency is, unfortunately, a growing problem. In this article, we hope to allay some of the fears you may have, by providing an overview of why this problem has become more widespread and, more importantly, how you can avoid it happening in your business.
We’ve had plenty of experience with troubled builders and prefer to see positive outcomes for everyone, rather than reading about another builder going bust.
That’s why we’ve put together some tips to keep everyone onside and to help your building company achieve better outcomes – even if it is currently struggling.
Overview of the builder insolvency problem
Builders cop all the blame when their companies fall over. However, there’s no doubt that costing and managing all aspects of a building project are incredibly difficult.
Builders also have the most stakeholders to deal with in any given project – managing the principal and their bank, as well as all of the subcontractors and suppliers.
A downturn in the construction industry, particularly in high-rise apartment projects, has put extra strain on the industry. With over $50 million in debts written off in building company liquidations in the first quarter of 2017, builders need to be more focussed than ever on their businesses.
The QBCC will be quick to suspend a builder’s licence where there are reports of payment issues by subbies. Licence suspension will mean immediate closure. This will create a massive hole on the balance sheet due to progress claims and retentions becoming uncollectable and principals incurring additional costs to complete projects.
No builder wants to watch the closure of their business and become the next ‘builder gone bust’ headline. The pain and anger caused to subcontractors, suppliers, the principal and employees only adds to the stress and anguish.
While acknowledging the challenges that builders face, some can be their own worst enemies. We’ve seen some builders ignore the warning signs and take desperate steps that only worsen the position for these stakeholders.
This is precisely the type of situation we aim to help you avoid…
Specific challenges of the recent downturn
In recent years, the boom in high-rise apartment projects has fuelled rapid growth for builders throughout south-east Queensland. A number of large builders have sought to maximise their own growth through slim margins and undercutting, driving down the profitability for the whole industry.
This approach has relied on continued growth, feeding cashflow with new projects. Cash is king, but a lack of profitability can’t be escaped. The recent downturn in new projects has meant the sting of overruns and unprofitable contracts is catching up with more builders. The strict QBCC licensing regime means non-payment of subbies will result in licensing issues and imminent closure. For directors, this means a career stopped in its tracks and insolvency becomes almost inevitable.
The Queensland construction industry is also at a disadvantage when compared with other industries and states. This is because the suspension of a QBCC licence, which occurs automatically upon entering Voluntary Administration or Liquidation, prevents any further trading.
When payment issues arise for builders, word spreads quickly and swift action can occur:
- Credit reporting agencies register defaults
- Credit insurers pull cover for builders
- Developers and banks start withholding payments out of concern
- Monies owed complaints are registered with the QBCC, giving builders 21 days to respond.
Every effort must therefore be made to avoid builder insolvency. And, if financial difficulties arise, a strategic, well-planned approach is a far better option with real prospects of success, than just hoping to trade through it.
Avoiding builder insolvency: What can you do?
Builders don’t go bust simply because of problems they face; all builders face problems from time to time!
The ones that don’t make it have not taken the necessary steps to build a solid foundation for their business or to meet problems head on when they do occur.
There are some fundamental business practices you should ensure you have in place to improve your chances, so that if times get tougher, you are better prepared.
The most important practices every builder should have are:
- Keeping records up-to-date and manage cashflow with three-month rolling forecasts. Funding gaps can be anticipated early to avoid problems.
- Finding specialist accountants and solicitors that know the building game. These advisors will have clients at all levels in the industry and can offer extra insight and perspectives you might not otherwise have. An end-to-end building lawyer will:
- know your contracts and whether the clauses will stand up in disputes
- be able to better advise on project issues that arise including latent conditions
- represent you in BCIPA claims, legal disputes and QCAT matters.
- Understand your QBCC Minimum Financial Requirements (MFR) ahead of time and monitor your net tangible assets (NTA) balance.
- Ensure you have the correct class of QBCC licence and you’re within your allowable turnover limit. Falling foul of these conditions will prevent you from using BCIPA and can disallow your entitlement to any profit.
- Ensure your job costings are properly informed, leaving minimal margin for error. Developers are negotiating contract specifications harder up-front to protect themselves from builders who try to make their profit in a wave of variations at completion.
- Ensure that the margin in your quotes is sufficient to ensure you earn a salary at least sufficient to cover your living costs. A race to the bottom will benefit no one, and you may end up paying, rather than being paid, to go to work.
- Don’t grow at the expense of profitability. Although, in theory, smaller margins on higher turnover is better, it also leads to larger problems if disputes arise, projects go pear-shaped or principals can’t pay.
- Ensure your organisation has the capabilities and systems to match the projects you’re taking on. Larger projects have more complex contracts, negotiations and responsibilities. Larger developers may take advantage of smaller builders who aren’t as adept at big projects. If problems arise, complete chaos can ensue and the project can become a massive headache and loss-maker.
- Decide how much of your business to commit to a single project. If disputes arise leading to non-payment, the big project that was going to make your year, could sink your business.
- Have any variations or extension of time (EOT) factors confirmed by email at the relevant times. Failing to do so will kill your profit and you’ll be hit with liquidated damages claims if you don’t hit practical completion on time.
- Ensure your claims are issued as BCIPA claims and take advantage of the process to fast-track recovery of debts where money is owed to you. Where a principal isn’t assessing, or is unreasonably not approving EOTs, and those matters result in costs for you, you should consider running matters to BCIPA adjudication to have the EOT question determined. This will (hopefully) help avoid liquidated damages down the line.
These are all common-sense practices that your building business can start following to create a more solid foundation.
In part two of this article, we’ll go beyond these standard practices and discuss the specific measures builders can take to deal with problems that can lead to their insolvency. This will include specific steps you’ll need to take if and when your business runs into trouble – and what to avoid doing.
If you have more immediate problems or questions that you’d like to discuss before then, feel free to get in touch.