The Cracks in the Foundation whitepaper by CreditorWatch has found the construction industry’s key credit metrics, such as late payment times and insolvencies, are set to worsen over the next 12 months as the impact of high-profile company collapses leaves a lasting impression.

This year has already seen the demise of several companies, starting with the voluntary administration of Probuild, one of Australia’s largest builders with a national pipeline of $5 billion, quickly followed by ABD Group, Privium Home, Condev and most recently Next Construction.

These failures were caused by an unfortunate storm of staff shortages, supply chain disruptions, cost blow-outs as inflation surges globally, and the gradual removal of COVID-19 government stimulus packages. Adding to these were inherent industry issues such as payment structures that disadvantage subcontractors, often operating on razor-thin profit margins.

The risk for Australia’s construction industry lies in the increasing likelihood of a domino effect collapse, which could have an extensive impact on economic recovery. A healthy construction industry is vital to a strong economy and ongoing growth, with the sector accounting for the employment of almost nine per cent of Australian workers and 7.5 percent of Australia’s GDP.

Equally, the indirect impact of construction cannot be underestimated.

“A crisis in the construction industry has the potential to flow through to wider industries,” adds CreditorWatch Chief Economist Anneke Thompson. “The importance of the sector to the economy cannot be limited to the physical build itself, but the ongoing financial benefit the end product provides. Failure to build enough hospitals, schools, roads and houses now because the industry is in crisis, will damage employment and economic growth years into the future.”

Rider Levett Bucknall’s Tender Price Index Series is forecasting significant increases in construction tender prices across Australian capital cities for the next three years. This, exacerbated by rising bank funding rates, means disruption in the sector will continue for the foreseeable future as contractors fail to meet their repayments.

“All key credit metric indicators from insolvencies to payment behaviours are pointing to some tough times ahead,” outlines CEO of Open Analytics James O’Donnell.

“The industry specific challenges of late payment times is of particular concern for SME subcontractors and suppliers, which are looking to deal with builders that pay promptly, an increasingly difficult task with approximately 12 per cent of construction companies averaging more than 60 days in payment arrears. This blowout in repayment times is far greater than any other sector, representing the almost normalisation of late payments and razor thin margins in the industry.”