Big builders enjoy recovery as insolvencies hammer small players
The fortunes of Australia’s largest commercial contractors have improved as cost growth slows and loss-making projects end, but increasing insolvencies among smaller subcontractors and suppliers are putting that recovery at risk by narrowing the industry base on which larger builders rely to get work done.
Financial reports lodged with the corporate regulator show the country’s biggest builders enjoyed a strong turnaround in the year to June, with profitability and margins increasing, as they put behind them the brutal losses triggered by fixed-price contracts.
But separate figures published by the Australian Securities and Investments Commission this week also show that the brutality continues for smaller and worse-capitalised businesses in commercial construction. Insolvencies for the financial year to date in the sector were up at 1431, an 18 per cent increase from last year.
And the pain is likely to continue.
“While the main pressure points on construction have definitely stabilised, we continue to see high insolvency levels in the sector driven by two factors,” said John Winter, the chief executive of insolvency industry body ARITA.
“Firstly, there is always a lag between the crisis point and when insolvencies peak – and it can be around two years. This is because firms, especially, small ones, will continue to try to trade their way out of worsening debt even long after they should have stopped.”
It poses a risk for bigger contractors, too. The loss of subcontractor resources due to insolvency has already caused apartment development to slow on the Gold Coast. Just 15 projects were completed last year, while 133 were under construction or waiting to begin in the thinly supplied market, The Australian Financial Review reported last month.
Official figures back up the picture of an improvement in construction.
Total construction output rose 1.6 per cent to $73.3 billion, a seven-year high, in the September quarter, driven by residential and infrastructure work and even though non-residential commercial construction fell 1 per cent quarter on quarter, the value of work was still 1.7 per cent higher than a year earlier, Australian Bureau of Statistics figures last week showed.
Happier days
Large contractors are benefiting from a more subdued cost environment.
“The impact of price escalation on materials was significantly reduced from the prior year,” said Michael Power, the chairman of Brisbane-based land developer BMD Group, which reported a 41 per cent jump in net earnings to $48.1 million.
“While escalation remains a key focus in all tenders, the impact of the stability of input prices is reflected in the profit outcome for the business.”
The improvement was widespread. Brisbane-based Hutchinson Builders said revenue rose 6.7 per cent to $3.3 billion and net profit leapt from $1.4 million to $14.1 million.
NSW contractor FDC said revenue jumped almost 21 per cent to $546 million and net profit rose 16 per cent to $16 million. Perth-based Georgiou Group revenue jumped almost 25 per cent to $1.3 billion and net profit climbed 36 per cent to $34.6 million.
Melbourne-based Kane Constructions swung to a net profit of $22.5 million from a meagre $1.2 million a year earlier – even as revenue fell 9 per cent to $957 million.
Not every large contractor reported an improvement. Sydney-based Richard Crookes Constructions last month said its after-tax loss deepened to $21 million as it realised losses on a clutch of remaining unprofitable projects. Contractor Built’s revenue fell 14 per cent to $2 billion and its net profit dropped almost 24 per cent to $32 million.
“We had some projects that were delayed and therefore revenue pushed into FY25,” the company said. “These projects are now underway, and we’re expecting significantly stronger financial growth this coming year.”
Still dragging
Pressures remain on smaller companies lower down the chain, which also creates a continued risk for larger contractors. In August, ASX-listed Lendlease said subcontractors going under cost the company $50 million in the year to June.
Melbourne-based contractor Kane said rising costs and subcontractor defaults cost it $13.8 million over the year to June.
Almost half (43 per cent) of the country’s 1431 construction insolvencies to date are in NSW, with 29 per cent in Victoria and 17 per cent in Queensland, the ASIC figures show.
“High interest rates, inflation and labour shortages continue to impact businesses in our sector,” Master Builders Australia chief executive Denita Wawn said.
“Even though some of the issues around building materials inflation are starting to abate, we’re still seeing the flow-on effect from the pandemic. Unfortunately, this continues to ripple throughout the industry.”
In a submission to the Senate’s select committee on cost of living in August ARITA said insolvencies in construction tended to trigger a chain of collapses as companies were often interdependent.
“The highly stratified subcontracting nature of the construction sector tends to lead to a cascading effect where when a primary contractor fails, small subcontractors may lose their only source of revenue and fail, leading then to solvency issues with suppliers and so on,” the association said.
Supply chain pressures on construction had also increased due to the worsening Middle East conflict that was prompting shipping lines coming from Europe to bypass the Suez Canal and take a longer route around the Cape of Good Hope, which was longer and more costly, it said.
