Home Innovation Builders, Dyldam Developments, Hotondo Homes franchise, Tasmanian Constructions, ABD Group, BA Murphy, Pindan, and Inside Out Construction have all gone bust. It’s time CFOs from the construction embraced financial transformation.
Construction giants like Probuild and Condev have collapsed. Many other construction companies are looking at downturns and the huge debt that’ll push them into a similar path to liquidation. Amendra Pratap, Managing Director at Octane, say:
“The rate of construction companies falling and going bankrupt is at an all-time high. The major reason behind such downfalls is the rise in the cost of operation and construction materials.”
The construction sector inflation will hit 6% over the year till December 2022 according to a report by Macromonitor. Matthew Mackey, executive director of engineering company Arcadis, told Daily Mail Australia: [1]
“I don't think a lot of companies are taking the cost increases seriously. It's a perfect storm”,
The market has become highly volatile. Even after the supply chains have become responsive, the material costs and commodity prices are shooting through the roof. Industry bodies have reported soaring timber prices by 50% to 100% in 2021. Steel has gone up between 30% to 60%. Similarly, concrete has gone up by 20% to 40%. Moscow’s war in Ukraine has also affected engineered timber products coming into Australia from Russia which added a further 25% price increase this year. Delays on other manufactured products, such as roof trusses, glass, and steel are also extending the time it takes to deliver projects and pushing up costs for the contractors. [2]
While companies try to manage big orders, they are struggling because they have locked themselves into agreements prior to the rise in costs.
“Fixed price contracts have brought down most of these builders as it makes them have no ability to pass on cost increases on timber and steel accounting”,
said Paul Bidwell, Master Builders Queensland deputy chief executive.[3] Adam Merlehan at SmartCompany quite appropriately pointed out that the construction industry is besieged by a profitless boom. Amendra says:
“When construction companies signed a contract for 6 months they didn’t take into account the sheer rise in the price of the materials and now it has left them exposed to a high cost and a thin profit margin. But legally they couldn’t raise the price and that’s why the deals automatically collapse.”
According to AFR, Australian CFOs are feeling optimistic about the prospects for their companies in 2022.[4]Deloitte in 2022 reported that over 80% of the country’s senior finance executives feel optimistic about the prospects for their company over the next 12 months. Deloitte partner, and CFO Program leader, Stephen Gustafson said:
“CFOs have acclimatised to tumultuous times, and with more confidence comes a greater appetite for risk. 41% of CFOs think they are under-geared, and 66% agree that now is a good time to be taking greater risk onto their balance sheets, up from 53% six months ago.”[5]
Now is the time to capitalise on the change.
Andrew Spring, partner at building insolvency specialist Jirsch Sutherland said:
"I wonder whether, off the back of this, we may need to see a reset in the industry as to how they go about pricing for work and assessing how to deal with these types of really rapid, difficult fluctuations." [6]
Andrew’s comments could not be further from the truth. Low profits, stagnant growth, and a huge dive into customer satisfaction have created a dire need for financial transformation in the industry.
We expect the consolidation in the construction industry to rapidly transform the whole industry in the next two years. At the end of this intense reshuffling, there’ll only be three types of companies left:
Amendra is quick to make the distinction and says:
“The quicker you evolve and the quicker you transform your department and your company into an entity that is smarter and makes data-based decisions, you’ll have a clear pathway to joining the list of companies that will be thriving.”
The companies that will thrive due to the financial transformation will be able to buy out all the collapsing deals and come out of this stronger than ever. Equipped with the right financial tools, they can separate the gems from the weeds in terms of deals they consider.
Financial transformation will not only help construction companies have greater control over their value chain but also help them take the leap toward data-driven decision-making.
The construction industry is not the first industry to encounter such disruption. Lessons can be drawn from other industries with similar attributes that went through similar disruptions. In the manufacturing industry, many players who thrived during and after the disruption were the ones who adopted digital and cloud-based solutions. As we discussed above, the same will happen for construction companies, the winning players will soon adopt cloud-based solutions.
As of now, it has started from the integrated production and distribution of electronic documents. An increasing number of suppliers and contractors are making heavy use of mobile apps to perform tasks while collecting, storing, and segmenting data to analyse, forecast, and fix productivity gaps in their projects and inefficiencies in their organisational health.
Contractors have realized the benefits of having real-time information on their hands to make critical forecasting and decisions. It not only provides them with a single source of truth for operations in their organization but also peace of mind because they have the backups in their cloud. Improvements in the ability to gather and analyse data will follow with the advancement of mobile and cloud technologies that make it possible to pull data from real-time sources.
Anthony Coundouris, Head of Client Relations at Octane, recommends that companies not jump too quickly into buying software. He says:
“You need to build a business case first. What it will cost and what it will return. CFOs who can do this stand a much higher chance of getting the organisation to buy in to financial transformation”.
Dexter Clarke, CFO of vehicle servicing company Motorserve, suggests other CFOs spend substantial time upfront understanding and mapping processes. He says:
“You need to do the work upfront to understand existing processes. If you don’t do that, don’t think a different system will give you an improved process. You’ve got to improve the process and understand where the waste is before you start talking to software vendors." [7]