- Firms are mostly paying their bills on time, but the rate of payment arrears is still high
- Just 3.8% of construction firms are expected to miss payments
- However, 11.7 per cent of construction companies had payments more than 60 days in arrears
A commercial credit reporting bureau with over 50,000 customers across Australia has published a new paper on the state of the construction industry.
The CreditorWatch paper notes the impact of variables on the construction industry, such as ongoing input constraints and skills shortages, to help creditors understand factors that influence payments and risks.
Rebuilding construction: tools for the future also discuss pathways to rebuilding the sector, including the value of using current data to drive decision-making.
Anneke Thompson, CreditorWatch Chief Economist, said although overruns and delays have had a significant impact, firms are nonetheless still paying their bills. The rate of payment arrears across the industry still remains a challenge.
“CreditorWatch’s Business Risk Index shows there is a relatively low probability of default among construction firms,” said Ms Thompson.
“Just 3.8 per cent of construction firms are expected to miss payments, compared to the highest sector, food and beverage services, which has a probability of default of 7.2 per cent.
“And yet, construction consistently tops the industry rankings for late payments. In August 2022, 11.7 per cent of construction companies had payments more than 60 days in arrears. The average is 8.5 per cent.”
What should businesses in the construction sector do?
CreditorWatch CEO Patrick Coghlan offered guidance for the sector.
“Adverse payment behaviour, credit risk, or directorial malpractice of a trading partner can threaten the viability of your operation.
“Failing to implement an appropriate debtor management strategy, or using incorrect data, may result in default or insolvency implications for your business. It’s essential that all creditors be managed effectively, with collections prioritised, in order to safeguard your cash flow. “
Across the industry, jobs data and other measures show softer conditions and improved stability.
Although some prices for core building inputs have declined, others have risen.
Timber and steel prices remain well above where they were when most housing contracts began, as evident in the below ABS data.
Building Construction Prices, Year-on-Year % Change
“The cost increase is sucking up contingency and profit margins within building projects,” continued Ms Thompson.
“In the worst cases, these increases are putting builders out of business. For new contracts, higher prices and interest rates mean home owners need to take out larger loans to cover the cost and finance of new houses. This should result in much lower construction starts as we move into 2023.”
“Higher wages will also mean higher costs at all stages of a project build and builders need to factor this into their quotes.
“Restarting migration will help to ease wage increases as more workers enter the workforce, although this will take some time to materialise.”
