Construction collapses now a “super-spreader event”, says Swinburne governance expert

The insolvency crisis ripping through the Australian construction industry is comparable to a “super-spreader event”, a corporate governance expert says, with financial hardships spreading from one business to another reminiscent of recent public health crises.

Data from Australia’s corporate regulators shows the number of construction businesses entering administration or external control for the first time effectively doubled between the 2021-2022 and 2022-2023 financial years.

Major factors include the surging cost of construction materials and labour, punishing businesses which signed fixed-price contracts before those costs exploded.

The collapse of major homebuilders like Porter Davis has also led to consequences downstream.

The firm left $71.5 million in unsecured creditors when it entered liquidation, heaping stress not only on homebuyers, but on small businesses subcontractors unlikely to obtain payment for work already completed.

Helen Bird, a corporate governance expert at a Swinburne University of Technology, said the overall construction sector crisis has the makings of a “super-spreader event”.

“It’s essentially like an infection,” Bird told SmartCompany on Thursday.

“So, one organisation or business is unable to pay money owed to creditors, then that [second] organisation is owed money, and in turn has become infected by the same crisis.

“And if everybody is under the same obligations and duress, from the economy generally, then we’re all in the position where money is very important.

“So it doesn’t take a lot to send one third-party supplier, for example, an electrician or a plumber, to the wall.”

Those third-party businesses may then collapse, leaving even more small businesses as creditors with little hope of recouping their costs.

“It’s essentially like when one person catches a cold, by the time it gets to the bottom of the cycle, everyone’s got the flu,” Bird said.

Building rescue package a “mask or vaccine”

While the outlook is stark, Bird suggests some targeted interventions could benefit at-risk construction businesses.

“The equivalent of a mask or a vaccine, in terms of supporting [business], is some kind of rescue package that would assist those parties affected by what’s going on here,” she said.

Some steps to assist homebuyers are already underway.

In April, the Victorian government announced a $15 million rescue package to refund the deposits of around 560 Porter Davis homebuyers, whose funds were not protected by domestic building insurance when the company collapsed.

The state government later revealed a $13 million top-up for homebuyers affected by other builder collapses.

As subcontractors wait for news of a similar bailout, Bird says other builders stepping in to complete those half-completed homes is something of an “anti-viral”, preventing suffering homebuyers and businesses from facing even worse outcomes.

“Even though this is about finances, it’s also about ongoing reputation” for the construction sector, she added.

“So it’s in the industry’s best interests to provide a solution for people” swept up in the crisis.

Crisis cause for industry reflection

Australia builders say subcontractors are increasingly requesting large deposits upfront, a move which Bird sees as sensible given the uncertainty across the industry and the longshot chances of remuneration as an unsecured creditor.

“It’s really important for these people to be making sure they themselves are engaging in prudent steps,” Bird said.

“You can’t rescue them from the current malaise, but it might make sure that for example, they’re partly paid funds before they provide services, or at least not go out of pocket.”

Long-term, the crisis may cause the industry to re-evaluate the use of fixed price contracts, Bird said, and even deeper self-reflection on “unchecked” weaknesses in the sector.

“And if they don’t fix up these issues, if they don’t address them, within time, government will do something, but it’s much better and more effective if it’s run by the industry itself.”