As mentioned in part one of this article, all builders face issues from time to time. Those that have created a strong foundation through solid business practices are better equipped to avoid the very real problem of builder insolvency when problems arise.
We saw in Part One what a huge problem insolvency has become in Queensland, with the recent downturn, tightening of cashflow, and the failure of some builders to make the necessary adjustments to their businesses.
To avoid being the next ‘builder gone bust’ story in the newspapers, consider the following tips on what to do and what not to do if you hit hard times.
Further steps to avoid potential issues arising
In addition to the fundamental business practices in part one of this article, think about implementing the following to further safeguard against hard times during the downturn:
- Consider surety bonds as an alternative to cash bonds or bank guarantees. Although, like bank guarantees they have a cost, the benefit to your business of having that final 5% of cash in your hands can make a huge difference to your cashflow and help with MFR requirements.
- Have a construction lawyer look over project contracts to make sure you understand the specific clauses included. Contracts will include clauses to protect developers if issues arise. You need to understand these risks and ensure your own terms are included, such as an equitable charging clause to allow lodgement of caveats over developer properties if they can’t pay.
- Do your due diligence on developers and also subcontractors before commencing a project. Consider whether they’ve been exposed to another builder insolvency, whether their debts are insured and gather evidence that proves they have sufficient finance to pay you during the project, as well as at completion. If you’d like help with this, we undertake these engagements and your accountant should also be able to assist with this.
- Ensure subcontractors complete work before leaving site. Sometimes subcontractors are not aware that their staff have not completed the work before invoicing you.
- Keep a close eye on your project managers. Often building company directors focus on winning work and lose sight of snowballing problems on existing projects which aren’t escalated to management.
- If cashflow permits, consider bringing forward payment timeframes for subcontractors to ensure your projects get priority and they stay on site to complete their work.
If you’re having trouble meeting payments
There are cases where even businesses that have set up all the safeguards against builder insolvency have trouble making the necessary payments.
If you have concerns over your future, consider the following:
- Cut costs early where you can. Make decisions quickly to maximise the prospect of your business surviving.
- Engage a professional adviser – a lawyer, accountant and/or insolvency or turnaround professional can help you consider and decide on the right approach to deal with your financial difficulties. You know your business best, but when you see problems ahead your professional advisers can provide guidance and information to help you make tough decisions about your challenges. The types of problems you’re experiencing will determine whether a legal or financial advisor, or a combination, will assist you best.
- Start putting a plan in place as soon as you start experiencing issues paying suppliers within usual terms. Options include:
- In the early stages, ATO and supplier payment plans may be suitable.
- If things are more serious, structured workouts can be achieved and there are a number of recent examples including the use of project bank accounts. Although it’s tough to admit problems, principals and subcontractors will generally support a plan with good prospects of better outcomes for them.
- In the event of a crisis, further finance may be unavailable and the best course may be for the orderly handover of one or more projects for developers to complete or by novating your contracts to other builders. Minimising the principal’s liquidated damages and set-off claims, and other creditors’ claims, will allow better prospects of avoiding builder insolvency and/or personal bankruptcy, potentially saving your QBCC licence.
- Start talking to the QBCC early if you want to retain your building licence to complete projects during voluntary administration. The QBCC is willing to work with proactive builders to try to achieve better outcomes for stakeholders. This should be done in conjunction with your proposed Administrator.
What NOT to do
Some builders panic at the thought of insolvency, trying to ignore problems or take steps to improve their own position at the expense of creditors. Taking well-considered, measured steps, despite the stressful situation you may find yourself in, can result in better outcomes for you and your creditors.
These are the steps we DON’T recommend taking:
- Signing statutory declarations falsely stating that subcontractors and suppliers have been paid to secure further payments.
- Over-claiming on payment claims because you’re desperate for cash.
- Continuing to trade without a strategic plan, just hoping you’ll get through – if trading while insolvent you could be personally liable for debts incurred.
- Undercutting and squeezing your margins to win work.
- Pushing out subcontractor or ATO payments – effectively using them to finance your business. Creditors will consider arrangement proposals which should be affordable to you.
- Promising payments to subcontractors in order to get them to do more work which they may not be paid for. Owing money is one thing, but accruing further debts will severely damage your reputation.
- Considering a phoenix of your building business. In Queensland your licence will be suspended and senior management may be excluded from holding a building licence. The reputational damage and potential exposure to legal claims are likely to outweigh any minor benefit.
We often see these activities when a builder is really struggling. If you have found yourself doing any of the above, they are immediate “red flags” indicating that you should be seeking urgent professional advice.
Need help now?
Don’t become the next ‘builder gone bust’ headline!
We deal with queries every day and talk to clients and their referrers about solving problems at various stages of difficulty. It’s never too early to get advice, and waiting too long can result in a worsening situation or good options no longer being available.
Get in touch for an initial chat or call us on 1300 4 CACTUS (1300 4 222 887).