Construction

Ongoing challenges but conditions to improve

In 2023, the construction sector faced a challenging year, with insolvencies increasing by 33% from July to November, compared to the monthly average of the previous year. The industry encountered raging inflation, supply chain disruptions, labour shortages, regulatory pressures and tightening credit markets. Many of these headwinds will subside, and we expect a gradual reduction in distress and insolvency. However, relationships will continue to be tested in 2024, particularly between developers, financiers, and head contractors.

The McGrathNicol Working Capital Report 2023 highlighted the working capital metrics of large construction companies. In recent years, there has been a trend of larger contractors slowing supplier payments where possible to improve their own cash flow. Our 2023 analysis showed a reversal of that trend, with average Days Payable Outstanding at the lowest it has been in six years. This suggests that additional support was provided to subcontractors to deliver projects and achieve financial stability.

Post-GFC, offshore lenders and the Big 4 banks reduced their construction sector exposure, paving the way for private capital growth. These private capital providers (and their borrowers) have been largely untested in recent times, but they are now facing their first significant market challenge. Historically easy-going private capital providers are expected to shadow borrowers and require more progress reporting to ensure project delivery this year while potentially claiming a larger share of project profits due to delays and breached covenants.

An increase in disputes is also anticipated, driven by historical activities and current economic conditions. These disputes are expected to become more frequent and prolonged without necessarily reaching court hearings. There is a growing trend of parties, including developers, contractors, and financiers, negotiating to share financial burdens to ensure project completion. Whoever holds the most leverage in these negotiations will determine which party feels the most pain.

While the construction sector is set to face ongoing challenges in 2024, there is still cautious optimism. Among larger industry participants, there is a growing sense that if you have survived the past few years and you are able to both continue to deliver into an undersupplied market and re-price your pipeline, the worst may be behind you.

More from the author, Partner Jonathan Henry

Many headwinds will subside in 2024, and we expect a gradual reduction in distress and insolvency. However, relationships will continue to be tested, particularly between developers, financiers, and head contractors.

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