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State-based licensing means troubled construction firms are caught in a catch-22.
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Building industry ‘needs legal scaffold’ to trade through crisis
02 August 2022
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The building industry needs special measures to cope with the economic crisis because state-based licensing rules prevent it from trading out of trouble, said the insolvency specialist at CPA Australia.
Fixed-price contracts, a labour shortage and huge increases in material prices were threatening construction firms but the legal scaffolding to hold them up was absent, said the manager of SMEs, insolvency and public practice, Kristen Beadle.
Speaking on the Accountants Daily podcast, Ms Beadle said accountants were talking to governments about the problem but getting a mixed reception.
“Governments hear the need, but there’s no discretion under legislation,” she said.
“Builders have state-based licences and to maintain those licences, they need to have insurance. Insolvency events trigger an insurance event, and insurance is automatically lost. Most state-based licensing commissions have the loss of insurance as an automatic strike-out.
“So builders might be shying away from putting up their hand saying, Well, we’re insolvent, we want to utilise commonwealth law to restructure our businesses to make them more viable.
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“They just don’t have that option because as soon as they lose their insurance, they don’t have a building licence any more.”
She said many otherwise viable businesses would be lost unless the law changed and overall, it would be a less expensive option.
“I was talking to a voluntary administrator recently who’d been appointed over a sizable construction company,” she said.
“He said the figure to do that – for him to trade on that business and have those projects complete – was $5 million less, give or take, than what it would have cost that particular government through insurance claims.
“That’s one of the benefits of the voluntary administration process. You work with the commerciality of those accountants to help through that process, because it may ultimately cost less.”
The proposal to government involved using the commercial nous of voluntary administrators to do an assessment of the business and work out if funding was needed to complete existing projects, and if the cash flow is there.
The crisis had come about due to supply chain problems and the Ukraine conflict, which caused delays to projects and pushed material costs. Then there was the labour shortage and the nature of building contracts themselves.
“Traditionally, building contracts are fixed-price contracts and that’s for a multitude of reasons. In construction, you have dates along the way where there’s milestones and that will be when your lender provides certain monies for you to pay for the next instalment of your build,” she said.
“The builder knows what he or she needs to work towards. The homeowner knows how much they need to borrow, and the banks know how much they need to loan.
“But because we’re in this storm at that moment where the escalation of cost is so high, those fixed-price contracts are now almost worthless.
“Chances are you’ve got a home owner going to the lender saying, ‘We need more money to finish it’ and the lender saying, ‘Well your house isn’t worth that. We’re not prepared to lend the rest of the funds.’ ’’
The flow-on effect could be devastating to everyone associated with a building project, from architects to electricians.
“We’re talking about the people that come in and put your kitchens and your bathrooms in, the people that lay your carpets, the people that design – all of these are part of that construction ecosystem that will be affected,” she said.
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