5 pressures for construction companies in the lead up to Christmas

As businesses start to emerge from recent lockdowns, ASIC has reported that insolvency activity is up 21% in the period to September 2021 compared to the same time last year.

While this comes off the back of relatively low insolvency figures due to temporary measures put in place during COVID, it’s a timely reminder for all businesses to assess their financial position in the lead up to Christmas. 

This is particularly important for businesses in property and construction, where the sector traditionally ranks highly for total insolvencies each year. Even though construction is booming in almost every part of Australia, the holiday shutdown period can be especially difficult.

Having supported many construction businesses in restructuring and recovery, we also know that lack of work is not a typical reason for insolvency.  

So whether your construction business is struggling, or you have more work than you can handle, here are 5 pressure points to be wary of as we round out 2021…

CASHFLOW PRESSURE

Many business owners in construction are flat chat right now. Certain incentives, such as the HomeBuilder Grant, caused a huge spike in demand at a time when people were also looking to direct surplus cash (i.e.: savings from not being able to travel) into home renovations or a new home build.

Trying to deliver all these projects amid COVID shutdowns and supply chain disruptions is certainly not easy. You may be too busy to dedicate time to record keeping or invoicing, while having to shell out large deposits to secure materials well in advance.

For these reasons, it’s vital to take a step back to gain a little perspective. The last thing you want to do is get caught in a loop of seeking expensive short term funding solutions which will impact your profit margin and could eventually sink your business.

Why get support: We know forecasting and budgeting can take a backseat when you’re busy. But if you don’t stay on top of it, all the work you’re doing could amount to big project losses at the end of the day. Talk to an experienced accountant or business adviser, and have them map out your cashflow to ensure you have enough working capital reserves to meet your project needs now and into the future.

UNDER-PRICING AND QUOTING ERRORS

Given the steep rise in demand for construction, the cost of materials such as timber and steel have gone through the roof. This is also true of labour costs, with many sub-contractors raising their rates as more companies compete for their services.

If you’re still working to complete last year’s projects, or are still quoting based on last year’s pricing, you could run into trouble. And unfortunately, you may not realise it until the project is complete.

Ideally, make it a high priority to review your books and records so quoting accurately reflects the latest labour and material costs. It’s also vital to stay up to date with tax obligations so you don’t get into a cycle of having to rob Peter to pay Paul – especially as the ATO plans to ramp up operations in 2022.  

Why get support: We can conduct a fast but thorough review of your pricing to make sure you are appropriately quoting jobs to protect your profit. We can also assist with getting your books and compliance obligations up to date so you always understand your financial position.  

LIQUIDATED DAMAGES DUE TO OVERDUE PROJECTS

We’ve seen a number of cases recently where clients of construction companies are refusing to accept delays due to COVID lockdowns. This places some builders at risk of penalties for not completing works on time, even though the circumstances were completely out of their control.

With increasing demand for services, we’ve also seen some builders taking on more than they can handle which has left them struggling to meet deadlines. This then leaves them open to liquidated damages if clients seek compensation for breach of contract.

Why get support: If you’re concerned about liquidated damages, reach out to your lawyer to understand your rights and obligations. We can also assist with an Options Report to help you gain a complete understanding of the options available to you in this scenario.  

DIFFICULTY DEALING WITH “BUSINESS STUFF”

Countless property and construction businesses are started by skilled tradespeople who have a knack for delivering quality products.

But technical skills don’t always translate into a passion for the “business side” of things. This includes effective project management and having the confidence to implement measures that ensure a healthy profit.

If you’ve been struggling to keep up with the business side of running your company, don’t let it get out of hand. Now is the time to bring in reinforcements to assist you in capitalising on opportunities without making rookie mistakes that could lead to insolvency. 

Why get support: We can help you make your business run like a well-oiled machine, with support across the full spectrum of tax, accounting, business and growth advisory, cloud accounting, and more.

DISPUTES BETWEEN OWNERS

Disputes between business owners or company directors is one of the most common causes of business failure. Particularly if the relationship falls apart and there is no partnership or shareholder agreement, the consequences can take a huge emotional and financial toll.

We often find that friends will start a business without ever documenting their agreement, which becomes a problem when it doesn’t go to plan. While it may begin as a 50/50 arrangement, one party invariably feels they have given more or done more for the company and is therefore owed more when it’s dissolved.

Keep in mind that the best time to document an agreement is at the start (when you’re still in love!). Consider a partnership or shareholder agreement like a prenup – you hope you don’t need it, but it provides great peace of mind if you do.

You should also re-visit your agreement regularly to make sure it’s still relevant. Like life, businesses go through cycles, and your agreement (as well as your business structure) should always reflect your present situation and vision for the future.  

Why get support: We can help you review your business structure for potential risks, while ensuring it is as tax efficient as possible. Once your structure is right, engage with your lawyer to develop or review your partnership or shareholder agreement. If your partnership is already at breaking point, we can provide mediation support to try and achieve the best possible outcome for all before it becomes a legal dispute.

For a free and completely confidential discussion on any concerns you have about your construction business, simply contact the restructuring and recovery team at your local RSM office.

For further information

If you require further information about the COVID-19 lockdown and grants available, please contact your local RSM adviser to find out more in relation to these measures.