The Australian economy is at a crucial point in its post-COVID-19 recovery. According to the March 2022 Creditor Watch Business Risk Index (BRI), Australian business activity is finally showing some signs of recovery. B2B trade activity has increased for a second month in a row – up 55 per cent on its January low (though still down 35 per cent year on year). Credit enquiries were also positive, rising 45 per cent over the last quarter. But there are also negatives. B2B trade payment defaults and court actions have continued to rise in March, which signals an increase in business insolvencies in the short to medium term.

Despite the positive signs, the Australian economy is facing several challenges that could derail the recovery, including post-COVID supply chain disruptions, increasing inflation, looming rate rises and labour shortages.

A healthy construction sector is vital to a strong economic recovery and ongoing growth. The industry employs roughly 9 per cent of Australian workers, putting it behind only healthcare, retail and professional services in terms of employment numbers. Construction directly accounts for 7.5 per cent of Australia’s gross domestic product (GDP). But its indirect impact is also substantial, with the sector contributing to building the likes of roads, warehouses, offices and hospitals that are needed to drive the economy.

A crisis in the construction industry has the potential to flow through to the broader economy. The sector is not only important while the build is happening, but also for the economic benefit that the end product provides. If we can’t build enough hospitals, schools, roads, and houses now, because the industry is in crisis, it impacts employment and economic growth years into the future.

According to the March 2022 CreditorWatch Business Risk Index (BRI), the construction industry has a relatively low probability of default at 3.9 per cent but the construction industry operates on thin margins, and those margins have been hit by a surge in costs as Australia and the rest of the world has moved to a higher inflationary environment. On the demand side, COVID-19 triggered a renovation boom. The Australian Bureau of Statistics (ABS) recorded a 27 per cent increase in the value of residential building work done on alterations or additions. On the supply side, ever-increasing costs are adding significant pressures on major building contractors through to smaller sub-contractors. Cost increases are being felt across the board, including building materials, labour, transport, storage and utilities.

Those cost rises could create additional pain for the construction sector as the Reserve Bank hikes interest rates to dampen inflation. Cost rises, not just in the construction sector, but across the country, are being fed through to inflation. Many economists agree in the months ahead, the Reserve Bank of Australia (RBA) is likely to increase the cash rate target from the record low of 0.1 per cent, to bring the inflation rate back within the target band of two per cent to three per cent.

In addition, despite a tough macroeconomic outlook, the industry is also grappling with industry-specific problems. Some argue that a big factor in subcontractor failures is ‘retentions’ where developers insist on 5 per cent to 10 per cent of each progress claim being held back until the job is finished to ensure that any defects are properly funded. Even when that hurdle is tackled, it often takes 12 months to finally get paid

Based on CreditorWatch’s customer payment data, about 12 per cent of construction businesses are more than 60 days in arrears on their payment to suppliers. That proportion is way above any other sector and represents almost a normalisation of late payment in the industry.

The industry’s woes have led to fresh calls for industry reforms and government support, but with no guarantee of imminent reforms or support, industry players and those linked to the industry need to protect themselves and be aware of early warning signs of companies entering financial difficulty.

With some indicators pointing towards a concerning outlook, now is the time to get in touch with TCS about your credit policy and procedures. We can offer assistance to ensure your debt recovery is fast and efficient, we can offer a range of reports and checks, and we can help advise you on your internal credit policies.

We recognise that every business and every case is different. We invite you to contact us directly for a confidential and obligation free chat about the best was to approach your specific needs.

With over 140 years’ experience in debt collection and credit management in the Tasmanian marketplace, we have the right people, tools, and knowledge to make a difference to your bottom line. Get your debtors under control quickly and easily by engaging our services now.

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Source – Creditor Watch – Cracks in the foundations – white paper