Lockton recently partnered with CreditorWatch, an Australian credit reporting agency, hosting an industry construction forum on the key challenges facing the industry and how businesses can properly manage risk.
From cost escalations to labour shortages, project delays to sustainability, the industry is doing it tough and these challenges are becoming more significant and complicated to manage.
Key takeaway: data enables better credit outcomes
On behalf of CreditorWatch, James O’Donnell from Open Analytics spoke about some key data insights from March 2023:
For small businesses, there was a large increase in B2B trade receivables. This was still low relative to a similar period in prior years, however this is heading in the right direction.
There was an increase in the number of external administrations, returning back up to levels similar to the 24-month average.
B2B payment defaults continue to increase ~20% YOY (external administration, and business administration).
Hospitality and construction have the highest turnover insolvency rates for 12 months April-22 to March-23.
The construction industry recorded the largest percentage increase in business turnover in February, rising 4.6% according to monthly figures released by the Australian Bureau of Statistics (ABS).
With the effect of inflation, the construction and manufacturing industries have experienced major input cost inflation, however, costs appear to be moderating to some extent.
Key takeaway: current trade credit insurance market is still open for business, despite rising risk
Lockton’s Senior Associate of Trade Credit & Political Risk Sam Rodda spoke about claims trends and the risk outlook of the trade credit insurance market. Lockton approached the local insurer markets for claims statistics and trends:
Construction was the single largest sector for both notifiable events and claims, a disproportionate amount compared to the premium pools. This coincides with the CreditorWatch and ASIC data, showing a sharp increase in construction insolvencies.
Interestingly there was also a disproportionate difference from notifiable event to actual claim value, indicating there is a decent chance for recoveries. Now is the time to review internal credit management procedures and collection processes/third parties.
There was also a sharp increase in construction-related repayment plans.
The current trade credit insurance market is still open for new business even in the light of an increase in recent insolvencies. Relatively flat top-line growth over 2020 and 2021 has seen risk appetite increase in late 2022 and early 2023.
Key takeaway: evolving construction risks and actionable strategies in uncertain times
Lockton Construction Manager Alistair Williams shared his insights on evolving construction risks that can lead to significant issues for businesses and insurers, including how to better manage them. Risks included:
Cost escalation. The current cost escalation for the 2022/2023 financial year is forecast to be 8-10% for residential construction and 6-8% for commercial construction, with the costs of some building materials increasing by as much as 40%-50%.
Insolvency. Contractors and subcontractors operating under lump sum contracts with slim margins and limited availability to cash or credit have been significantly impacted by COVID-19. Some of the insurance implications are the cessation of insurance coverage and material change to project risk.
Post-loss sufficiency. These should be reviewed regularly in line with the contract value escalation to ensure sufficiency of insurance for reinstatement cost in the event of damage - costs in the current climate can be significantly more than originally forecast.
Workmanship. Not having the ability to recover either time or cost escalation can lead to corner cutting for workmanship, or product substitution. This could create insurable risks not initially anticipated, nor fully covered by the existing insurance arrangements.
Moving forward with the times
Lockton recommends key project participants fully understand the implications of evolving “insurable” risks. Companies can mitigate risks by:
Understanding contractual risk alignment and contracting models. When it comes to Guaranteed Maximum Price/Lump Sum, know what is included and be clear that what is not. Look at the variations of time and cost.
When it comes to payment structures and payments claims, know your rights and requirements. Make sure documentation is done on time with no delays.
Consider Alliance based principles for risk allocation – pain share and gain share. Take a measured approach to risks you can control and look to share risks you cannot.
Have credit and insolvency checks and work with a company such as CreditorWatch. When it comes to the construction program, analyse how aggressive the program is and identify critical path impacts.
CFO of Richard Crookes David Sharp wrapped up the forum by discussing how CreditorWatch helps the construction company in the new business space. The company utilises CreditorWatch data for current projects and historical data for both decision-making and detecting underlying issues.
What is the way forward for the construction industry?
The Australian construction industry is currently facing a barrage of challenges, from supply chain disruptions, to rising interest rates, labour shortages and cost blowouts as well as high profile business collapses. So how can businesses best protect themselves from these and even thrive?
In this CreditorWatch whitepaper (opens a new window), a panel of recognised construction industry experts take you through the multiple issues confronting the industry and how best to manage them. It covers:
The latest data on the health of the construction sector.
The state of play for smaller construction firms.
What construction businesses can do to navigate difficult market conditions.
The construction sector outlook.
CreditorWatch is the leading commercial credit reporting bureau in Australia. Over 55,000 customers access and contribute data to CreditorWatch, helping businesses of all sizes and industries reduce their exposure to the risk of credit default.