by Adam Lysle

In the last two weeks, we have seen an increased focus on the risks associated in dealing with operators in the property sector. In fact, the entire business community seems to be enveloped in interest in the world of various collapses that have taken place over the last few months and years. One larger collapse which has attracted a significant amount of interest is the collapse of Project Group, a Victorian builder.

With debts owing of between $22 million to $50 million, the largest division of the sector that appears to be potentially exposed are the sub-contractors. With just under 1,500 companies fallinginto external administration within the construction industry each year at present, the reality is that the sub-contractors seem to wear the brunt of the fall-out from these collapses.

At our recent breakfast seminar, our expert panel revealed that the Property and Construction industry provides for approximately 13% of Australia’s GDP with $27 billion of construction works being completed every quarter. Potentially of most significance is that the sector employs 1.4 million people and probably the majority of those work for sub-contractors each vying for every dollar that they can get while some of the owners, developers and builders seem to expend the subbies without any thought.

Now blaming the owners, developers and builders is not entirely fair either but it is clear now that the Security of Payments Act which was designed to assist prompt payments for those operators seeking regularity in their cash flow positions are now being squeezed even further by some larger builders who seem to believe that it is perfectly reasonable to burn people at any expense.

Project Group had 800 sub-contractors on their books and if an exercise was carried out in calculating the numbers of sub-contractors of all the 1,500 collapses over the last year, it could end up that the numbers of affected people could venture into the multiples of tens of thousands. Whilst it also isn’t fair to imply that builders intend to burn subbies, the reality is, maybe we all as a business community need to accept that sub-contractors should no longer be left as the ‘last man standing’ when these collapses take place and sub-contractors should take note of acting earlier and potentially preventing disasters when collapses occur.

That said, it is fair and reasonable for all entrepreneurial operators within the sector to ensure that they measure their own risk and establish good quality relationships, agreements and understandings with the relevant stakeholders that they seek to engage with. Risk can be measured not only in monetary terms but also non-monetary terms. Guarantees; whilst initially attractive, can often become unenforceable or worthless.

With the property and construction sector contributing to 22% of all corporate collapses each year, it is a timely warning to get good advice about how a business is structured, assets are acquired and protected, how lenders can secure their respective exposures and how directors can ensure that their hard work ultimately leads towards the very goals that they are seeking to achieve. Veritas Advisory is well placed; with a strong understanding of the sector, to assist lenders, accountants, lawyers and business owners with good advice in respect of issues that the Project Group collapse has raised.

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