The construction industry is ranked second for insolvencies in Australia, according to ASIC, representing almost 17% of all insolvencies in the country.
The reasons for insolvency are often varied and complex. However, a report commissioned by the Senate Economics References Committee named inadequate cash flow and poor financial control as the top cause for insolvency in the construction industry. These included a lack of record-keeping and high cash use.
More recently, cash flow troubles had been one of the root causes for West Australian Building Company being forced to suspend its subcontractors’ work while it reviews its financial position. Poor cash flow management can have lasting and disastrous repercussions for construction companies.
However, thanks to advances in technology, there are now some promising solutions available. Managing cash flow for construction companies, subcontractors, and general contractors can be made easier with the right tools and software.
Jobsite ANZ spoke to Christian Luckow, CEO of supply chain financing company OmniPay, about what the platform is doing to make finance in construction a more collaborative, transparent, and incentivised process.
OmniPay assists subcontractors in gaining a crucial ability to manage their cash flow. It also helps balancing a multitude of varying payments terms across builders to ensure they manage to meet their commitments. General contractors using OmniPay gain a stronger and more stable supply chain.
Luckow notes the company has encountered many very profitable subcontractors who got caught out by a single, large late payment, and were unable to bridge the period between payment terms.
Keeping it Flowing
Luckow says the construction industry is in a challenging position when it comes to supply chain finance, as it has the fewest options available.
“It’s worth noting that whilst the trend to longer payment terms can place stress on businesses, it can be planned for and taken into account. What is causing the most issues and consequent business insolvencies is late payment,” he says. “Subcontractors simply don’t have sufficient working capital during periods of high growth to be able to cope with late payments.”
The issue is much the same for general contractors. Luckow notes that a “small minority” of general contractors have historically used late payments to subcontractors as a form of bank account and held a view that if a subcontractor goes under, it is not their problem.
“However, the time and costs — not to mention headaches — associated with getting a new subcontractor in to tender and complete work are substantial. OmniPay helps general contractors have a happy, appreciative, and stronger supply chain.”