The Australian construction industry has achieved an unfortunate distinction, leading the nation in corporate insolvencies for the financial year 2023-24. According to data from the Australian Securities and Investments Commission (ASIC), construction companies accounted for more than one in four of the record 11,049 corporate collapses. This total figure represents a 40% increase in insolvencies, driven by persistent inflation, high interest rates, and aggressive debt collection by the ATO.
The total number of insolvencies for the year is the highest recorded by ASIC since 1999-2000, surpassing the previous peak during the global financial crisis. However, as a proportion of total companies, the failure rate remains lower than during the GFC.
There were a total of 2,975 construction companies entering external administration in the year ending June 30. Other affected sectors include accommodation and food services with 1,667 insolvencies, followed by general services, retail, professional services, manufacturing, and healthcare.
Despite the rise in insolvencies, some economic resilience remains, with a low 4% unemployment rate, a surging share market, and low home default rates.
NCI claims data also indicates that building and construction has also been the riskiest industry in FY24, it takes out the top spot in both value and number of incoming claims, followed by electrical.
NCI Economic expert Stephen Koukoulas recently commented that “the number of residential building approvals edged up in May but were only marginally above an 11-year low. Residential construction activity remains significantly below the level required to meet housing demand from strong population growth.” Again, indicating that businesses dealing in this industry should be wary.
Businesses in Great Britain, Germany, France, Italy, the Netherlands and Spain are all heavy users of the Trade Credit Insurance (TCI) product and have protected themselves against the risk of a bad debt, just like any other business insurance, for many decades. Australian businesses are still learning about the benefits of TCI but are quickly snapping up the product given the level of current and growing insolvencies.
Businesses with any trade exposure to the building and construction industry should consider protecting them against a potential bad debt, especially those that are seeking to grow and take on new customers.