The building and construction industry employs over 1.3 million people in Australia(1) and contributes around 11% to the country’s GDP(2).
Despite this significant contribution, the reality is building and construction businesses rank consistently as one of the most at-risk sectors for insolvency. In 2024, nearly 27% of all company insolvencies reported by ASIC were from the construction sector. In the first three quarters of the 2025 financial year (up to 31 March), construction-related insolvencies have risen by approximately 24% compared to the same period last year (3).
For accountants and professional advisors, identifying early warning signs and structural weaknesses within the construction industry is crucial, not only to protect their clients’ financial interests, but also to prepare for the accounting and compliance challenges that arise when a construction company collapses or restructures.
Why Construction Fails More Than Any Other Sector
· Cash Flow Vulnerabilities
It is no secret that the construction industry operates on wafer thin margins with often lengthy payment cycles. It is not uncommon for subcontractors to wait 60-90 days for payments, all in an environment where staff wages, supplier accounts and general overheads all need to be paid. Delays or disputes from just one construction project can escalate and have a devastating impact on cashflow.
· Fixed-Price Contract Risks
Fixed-price contracts continue to be prevalent in construction, especially in residential builds. While predictable for clients, they are a gamble for builders. Volatilities with cost surges (as seen post-COVID), labour shortages, or weather delays can turn what appeared at the outset to be a profitable job into a financial disaster if contingency clauses are not included.
· Supply Chain
The construction industry relies heavily on its external suppliers, many of whom are small unsecured creditors which adds to the industry’s risk profile. This interdependence can have serious implications in the event of insolvency. The failure of a building contractor can trigger a domino effect, impacting a wide network of unsecured suppliers. Conversely, the insolvency of a key supplier can lead to major project delays and cash flow issues for the contractor.
· Poor Project Management
A significant number of insolvencies occur due to poor internal controls. In pursuit of a steady workflow, builders may take on too many projects simultaneously, putting strain on labour and financial resources, contract deadlines, and quality assurance. When not properly managed, a high volume of work can conceal inefficiencies and weak internal controls, often resulting in unprofitable projects.
Insolvency Red Flags for Accountants and Advisers
Accountants and legal professionals play an important role in identifying issues early. The following is a shortlist of some signs that trouble is on the horizon:
· Poor Financial Management of Projects
If your client is unable to clearly express the current profitability of each active project, this can be a major concern. Typical of many construction failures is management losing control of the project specific costs and simply relying on receiving the next progress payment, (from whatever project) to manage cashflow.
· Receivables Delays
Blowouts in the payment timeframe of accounts receivables especially from larger clients is an indicator that things are not as they should be. For reasons mentioned earlier, delays in payment for completed work can have a disastrous knock-on effect on cashflow.
· Over Reliance on ATO
Another indicator of financial trouble is getting behind in ATO lodgements and a growing taxation debt. Quite often the ATO are the largest creditor in construction insolvencies. Payment Arrangements, defaults and late lodgements are commonplace for construction businesses on the verge of insolvency.
· Sharp Increases in Short-Term Debt
Taking on high-interest short-term loans or seeking bridging finance to manage cash flow can point to financial concerns. Often, these short-term solutions add to the problems instead of solving them.
· Frequent Disputes or Legal Claims
Frequent subcontractor disputes or warranty insurance claims may be symptomatic of underlying managerial problems or financial stresses acting as a catalyst for these conflicts.
Construction insolvencies rarely happen in isolation. When a major builder collapses, it often takes numerous subcontractors and small supplier businesses with it. These businesses, many of whom have an over reliance on a handful of clients for their revenue, are often left with unpaid invoices and little in the way of recourse. Encouraging clients to diversify income sources where possible, securing payments upfront and taking security where possible can act as safeguards against such threats.
What Can Accountants Be Doing?
1. Engage with Clients
Communication and regular check-ins with construction clients is critical. By engaging in an open dialogue and regularly checking in, the first signs of troubled waters may be identified and appropriate action plans implemented to mitigate future financial risks.
2. Stress-Test Cash Flows
The use of cashflow forecasts and testing against various business stresses can highlight areas of concern. What impacts would certain project delays, price increases or a particular bad debt have on cashflow?
3. Review Contracts
Encourage building clients to obtain qualified legal advice when reviewing their contracts, ensuring that fixed-price agreements include appropriately considered contingency clauses.
4. Understand the Personal Risks
Have a plan in place: review director loan accounts, personal guarantees, ATO lodgement history and asset protection strategies. Understanding the personal exposures can assist with informed decision making and the development of strategies, should financial difficulties present.
5. Encourage Project Monitoring
Constant assessment of costs, timeframes and delivery on a project specific basis should be non-negotiable. The better the information, the earlier warning signs can be detected.
6. Know When to Call in the Experts
If a construction client shows signs of financial distress, don’t delay. Early engagement with an insolvency practitioner can preserve value, create options, and protect directors from breaching their duties under the Corporations Act.
The construction industry has long been characterised by high risk and complexity, factors that show no signs of easing given the well-documented challenges the sector continues to face. However, with sound financial management, strategic planning, and timely intervention, many business failures can be avoided or at least mitigated. For accountants and advisers, taking a proactive approach is not merely best practice, it's an essential safeguard in a sector where uncertainty is the norm.
Reference List
(1) https://www.jobsandskills.gov.au/data/occupation-and-industry-profiles/industries/construction
(2) https://masterbuilders.com.au/wp-content/uploads/2024/05/Industry-snapshot_May-2024.pdf
(3) https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/
