Navigating the Construction & Infrastructure industry with caution

The Federal Budget contained some positives for the infrastructure and construction industry with over $10 billion pledged to roads, rail and “shovel ready” projects. This is welcome news for the industry which will form a major part of the economic recovery, however historical industry challenges still remain and will need to be proactively managed to capitalise on upcoming opportunities.
 

The Morrison Government’s 2020 budget extended its $100 billion infrastructure commitment announced last year by a number of additional announcements totalling c. $10 billion and renewed incentives to supporting the construction industry. This commitment includes:

  • $8 billion in state specific road and rail projects and $2 billion for additional State and Territory road safety upgrades; and
  • measures designed to increase construction cash flow now, including the HomeBuilder scheme, an expansion to the First Home Loan Deposit Scheme and the introduction of the Job Maker hiring credit and Supporting Apprentices & Trainees 50% wage subsidy.

This is separate to and in addition to the $1 billion of defence related contract spend brought forward to 2020-21 (which is part of the $270 billion spend already committed by the Federal Government for the next 10 years).

The spending commitments mean the industry can plan for the near term knowing there will be revenue opportunities. Revenue is however only part of the story in one of the most competitive and working capital intensive industries in the world.

Past Government funded construction boosts such as the Building the Education Revolution (BER) provided stimulus to the sector but also resulted in some fallout as operators competed for low margin projects, grew too quickly and didn’t manage the complexities of working capital management during that growth.

Regulatory change such as the Security of Payment Act (NSW), the Building Industry Fairness (Security of Payment) Act (Qld) and the upcoming Payment Times Reporting Scheme are all designed to shore up payment timeframes (for suppliers) so each participant in the supply chain must ensure it is managing its collection timeframes to ensure it has sufficient cash to pay suppliers and keep projects on track.

As such, balance sheet strength, working capital management and supply chain confidence in our view remain critical success factors and need to be proactively managed to benefit from Budget opportunities. Moving forward, high-level focus areas for each layer of the contracting chain should include:

Local and State Governments
Heightened focus on procurement and contract management. In particular, robust financial due diligence during the procurement process, consideration of financial security and then regular counterparty due diligence during the contract lifecycle.

Principal Contractors
Working capital and cash focus – ensuring there are sufficient funds or funding lines available to support an upward shift in activity and likely requirement for greater financial security. Managing cash collection processes so that cash is available to make timely payments, all the while, having visibility over the financial strength of subcontractors and contingency plans in the event of subcontractor disruption, will be important.

Subcontractors
Careful selection of project counterparties and clear understanding of the payment claim process and timeframes.

The recent Budget announcement will contribute to the strength of the sector and the economy more broadly, however the challenging market environment will require careful navigation. As such, it is important not to just monitor your own financial viability, but the viability of key contract counterparties and be aware of any lead indicators of financial stress. Doing so is important for planning, risk management and value protection purposes. To learn more about identifying “early warning signs”, please refer here.

AUTHORED BY

Jason Ireland

Jason Ireland
Partner, Sydney
T: +61 2 9338 2694
E: jireland

Mark Holland

Mark Holland
Director, Brisbane
T: +61 7 3333 9868
E: mholland