Case Study: A New Industry Rating Tool can highlight the early warning signs of Probuild and others years before collapse

With the right data, it's possible to see the early warning signs when a building firm like Probuild starts to struggle. A data-driven assessment conducted after Probuild's demise shows there were plenty of danger signals in the years leading up to its unfortunate demise.

The assessment was undertaken using the new Independent Construction Industry ratings Tool, iCIRT, endorsed by the NSW Government. Regulated ratings agency, Equifax, leveraged thousands of data points to analyse Probuild's health for the period from 2019 to 2021. The data painted a damning picture: project delays impacting profitability, significant creditor exposure, high debt levels, high-value litigation, thin margins, operating cash outflows, and an interesting decision to extend funds to a struggling sister entity while heavily dependent on continued support from its offshore parent. All the while, the company's iCIRT rating continued to suffer, ending up in the very highest of risk categories.

While we acknowledge that some other market participants suggested they were able to identify the company’s demise months in advance, that is often too late. Here we share some eye-opening insights, well in advance, discovered by iCIRT that shed light on what was going on behind closed doors to bring about Probuild's dramatic collapse.

2019: Signs of risk had already emerged

iCIRT rated Probuild with 2.5 bronze stars / Medium to High Risk in October 2019. This rating is below the "trustworthy" benchmark requiring a minimum of three gold stars (out of five stars). The NSW Government has been calling for industry to obtain and publish their iCIRT rating on the soon-to-be-released public-facing register, and Probuild would have been excluded from the register of trusted construction firms with a rating this poor.

Red flags included:

• Project delays impacting profitability with limited working capital, dividend payouts, and significant creditor exposure
• Low net asset backing and contagion risk to related and associated parties with higher risk scores
• High-value litigation in the Victorian Supreme Court relating to their Abbotsford development.

2020: Warning signs escalate

A year later, Probuild's iCIRT rating would have dropped to 2-bronze stars / Medium to High Risk.

Red flags included:

• Significant losses relating to their Queen Street, Brisbane development, with a reduction in net assets and equity
• Operating losses and limited borrowing capacity, with higher risk commercial scores associated with the company's officeholders, as well as the ultimate Australian holding company and its officeholders
• Significant funds extended to a sister entity. Alarmingly, the sister entity had a higher risk score than Probuild.

2021: Risk rating plummets to lowest possible level

In November 2021, iCIRT rated Probuild with a 1-bronze star rating / Very High Risk. This bottom rating indicates to other industry players that they would substantially increase their risk exposure by doing business with Probuild.

Red flags included:

• Significant sales contraction with project delays, concentration risk and thin margins
• Net operating cash outflow of -$85m with lower working capital levels and significant creditor exposure, with limited asset backing and funds extended to related parties eroding capital adequacy levels
• Default judgement on the company, and material court judgements on director-related parties, with director commercial scores impacted by the recent administration of a director-related entity.

Data as an early warning tool

The failure of big builders like Probuild, Privium and Ralan Group has fuelled growing concern that more will follow in their wake, as the industry faces the pressures of low margins, thin capitalisation, supply disruptions, project delays, cost blowouts and poor insight into supply chain risk.

With the construction industry playing such an essential role in Australia's economy, the trickle-down domino effect of more failed businesses is expected to be significant. All this uncertainty and fear at a time when Australia has been looking to the residential building sector as a stimulator for economic recovery.

To boost this sector and create the necessary consumer confidence to stimulate the economy, it's crucial for the players who make up the industry – the developers, builders, sub-contractors, certifiers, consultants, insurers and property buyers – to have the power of choice. The choice of knowing that this player has the capability and sustainability to reliably deliver, versus one that presents higher risk attributes. The option to be informed enough to trust whom they do business with. The transparency of trustworthiness is good for constructors, good for consumers, and good for the community.

Constructors don't collapse overnight, and data-driven star-rating insights can be used as an early warning tool to bring transparency to a player's likely capability, capacity, and willingness to deliver a safe, compliant, and durable built asset. iCIRT shows that 9 out of 10 construction insolvencies have a high-risk profile at least 12 months before insolvency (using Equifax’s base level iCIRT assessment service). With the rollout of this independent rating will come much-needed visibility to an industry where reliable, independent data has up until now been hard to come by.

Having data and evidence, an independent rating, and the ability to establish who are the trusted and proven players in the market is invaluable. It absolutely cuts through the issue of where the risk sits across the broader construction ecosystem," says Brad Walters, Head of Product and Rating Services, Equifax.

Identify the trusted players

Given the high contagion risk in the building sector, all it takes is one weak point to bring down a network of associated players. In the case of Probuild, the number of customers, employees, contractors, and small business owners impacted is in the thousands. Major construction projects in development across Australia are at risk. Sadly, many consumers and industry players were largely in the dark when it came to making an informed choice about working with a higher risk player like Probuild.

The collapse of construction giants like Probuild could have been anticipated. The data doesn't lie, not when you widen the corporate net and delve deep into a wide expanse of various data sources covering aspects like track record, key persons, past projects, capital, risk management and ownership structure", Mr Walters says.

A robust and transparent data-driven assessment that connects the dots within a web of beneficial ownership structures, body corporate and sister entities, and key trading partners extends the line of sight and improves player traceability across the supply chain.

The data-driven insights of iCIRT are critical to separate the good players from the high-risk operators. From here, trust and profitable growth should follow as higher-rated, quality players construct quality buildings, improving confidence in construction for all.

iCIRT by Equifax is an independent construction industry star-rating tool to assess builders, developers, contractors and other parties involved in building construction. Equifax Australasia Credit Ratings Pty Ltd (Equifax) is a regulated ratings agency and global data and analytics company with the required rigour, disciplines and oversight to ensure rating outcome integrity, quality and independence. Our large number of existing market connections and significant data assets enables us to lift the corporate veil and provide confidence to the market by leveraging digital insights from over 900 million consumers and businesses across 24 countries.

To find out more please visit buildrating.com or contact us on helloau@equifax.com.