Construction industry a poor substitute for banks

Construction insolvencies will continue to rise unless industry payment practices change.

A new report by the Australian Constructors Association, Credit where credit’s due – Improving security of payment and liquidity in the construction industry, calls on government and other clients to stop treating construction contractors and suppliers like financial institutions.

Australian Constructors Association CEO Jon Davies said the industry has essentially had to bank roll projects on behalf of clients.

“Construction is one of the few industries operating under a cash negative payment regime where work is undertaken for third parties without payment until after materials have been ordered and fixed to site,” said Mr Davies.

“Airbus requires 20 per cent of the capital costs to be paid upfront before manufacture of a new plane and with a price tag of US$445 million – an investment that is comparable to a mid-range construction project.

“Construction projects are no different to any other significant purchase and should be financed through institutions that are appropriately set up to do this.”

The current construction boom combined with rapidly increasing prices and shortages of materials and labour have negatively impacted business balance sheets and cash reserves resulting in an increase in insolvencies.

“More businesses fail in construction than any other industry,” said Mr Davies.

“Prompt and fair payment is essential for the health of the industry, starting with advance payments. Advance payment should be provided for site mobilisation costs and long lead, high value procurement items to avoid the contractor commencing in a cash negative position and reduce the risk of material price escalation.

“Several other policy responses are available to improve liquidity and address security of payment throughout the industry without resorting to the costly, burdensome and ineffective method of project bank accounts.”

Improving payment frequency, simplifying claims processes and increasing bid cost reimbursements are some of the solutions posed by the Australian Constructors Association, along with a call out to the Federal Government to standardise security of payment regulations across the states.

“More upfront payment would flow down through the industry the same way risk currently does but this would be positive.

“By tying up industry capital, clients are missing out on the opportunity for increased innovation, reductions in carbon emissions, increases in productivity and reductions in the overall cost of construction.

“More importantly, construction clients are significantly increasing instability in the industry on which they are relying.

“For the sake of the economy, the environment and wider society we need to improve the financial health of construction industry and we need to start now,” Mr Davies said.