How to Prepare for a Construction Sector Downturn

Posted by Rukan Zaman on Jul 11, 2019 11:42:09 AM

Construction downturn

The construction sector is weakening under pressure from the early stages of what appears to be a sharp downturn in housing construction and signs of a topping out in non-residential construction activity.

There is no question that things are deteriorating in the sector, which appears to be confirmed by share market investors who, since the middle of 2018, have been selling construction shares.

The level of public sector infrastructure spending has been strong, but near-term growth may slow as some projects reach completion.

illion’s Economics Adviser, Stephen Koukoulas, notes in our special report that any new projects in the aftermath of the Federal election will be important – and especially whether the State and Territory governments commit to new projects proposed by the Commonwealth Government.

Unfortunately as projects come to an end, there is not a lot of evidence currently to suggest that State and Territories are adding to the sector in the short-term.

What I’ve found to be a bit concerning is that many people appear to have their heads in the sand when it comes to what’s actually happening in the sector. Our latest illion Business Expectations Survey reveals a sharp slump in actual activity, even though expected activity was relatively firm. It seems that expectations in the sector are more positive than actual performance!

Business Expectations Graph

What are the risks?

Due to the significant uncertainty and risks in the construction sector, there is a high likelihood of increased insolvencies. As such, it is critical for those exposed to the construction sector to take appropriate risk management precautions.

When a client, supplier, or business partner gets into financial difficulty, this will cause delays, disruptions, financial loss and reputational damage. With the right forward-looking approach, the risk of these negative outcomes will be significantly reduced.

What can you do to prepare?

Businesses in the sector routinely perform credit or financial assessments and/or risk monitoring, and illion has the best commercial data-set on the market to compare all the options quickly and efficiently in order to make an informed decision about a robust end-to-end process.

In one instance, we are assisting a large civil contractor that won a tender for a substantial public works contract. The firm has thousands of subcontractors that they use routinely to complete work of this nature, and we are undertaking credit and financial assessments and ongoing monitoring for the duration of the project.

In another instance, one of Australia’s largest commercial builders is using illion to conduct forward-looking financial viability & financial capacity assessments on their larger sub-contractors. These financial assessments are conducted by illion’s team of chartered accountants, who provide a professional opinion based on an independent, rigorous assessment of financial statements, work in progress reports, bank facilities, and independent credit checking.

Testing of the work In progress reports has ensured a better understanding of the amount of work that each sub-contractor was taking on as this can be as problematic as having an insufficient amount of work.

Don’t be one of those people who denies there is a problem. Download illion's special report to find out more and future proof your company.

New call-to-action

Topics: Australian Economy, Construction