Early warning signs for construction operators on the road to economic recovery

27 August 2020

Construction activity is currently at a five year low. Although many state governments have committed to stimulus and accelerated state funded projects, variable demand, supply chain disruption, changing work practices and increased regulatory oversight are likely to challenge many operators in the construction sector.

In a bid to protect construction operators, the Australian Construction Industry Forum (ACIF) in a recent submission to Government called for more timely advancement of government construction projects, additional industry stimulus and quicker timeframes to process project payments and conduct procurement activities.

Whilst some states have already made additional stimulus and capital project commitments, the Performance of Construction Index (PCI) currently sits at levels not seen since the Global Financial Crisis. Therefore, a period of intensive competition, low margins and increased project and financial risk is almost a certainty. This is combined with a risk of private developer distress.

There will be “winners and losers” over this period as businesses need to quickly adapt to new operational practices whilst dealing with the winding back of JobKeeper, the conclusion of the moratorium on insolvent trading and continued subdued private investment for residential and non-residential construction markets forecast for the next 12 months.

As such, now more than ever construction operators, their Directors and stakeholders should closely monitor the “early warning signs” or lead indicators of financial distress. Whilst poor profitability, covenant near-breaches, unpaid subcontractors and limited cash reserves are obvious indicators, we set out below some further indicators we have seen monitored by companies or their stakeholders in this industry.

Knowing of, identifying and monitoring lead indicators of financial distress facilitates better planning, viability responsive action and helps Directors meet their legal duties.

Early warning signs