Construction Insolvency Trends and Financial Health of Construction Businesses

By Girish Jethani, Senior Ratings Analyst, Equifax and Peter Cobiac, Deputy Chief Ratings Analyst, Equifax

The pace of businesses engaged in construction activity employing more than 5 full time staff (FTE) entering initial external administration has slowed in the financial year ended June 2024. This is in contrast to the businesses employing less than 5 full time staff which continue to report a higher number of initial external administrations, thus lifting the overall construction business failure levels to record highs (Exhibit 1).

Exhibit 1: Slowing Pace of Mid - Large construction businesses entering initial external administration* 

*Source: ASIC Insolvency Statistics Series 3.1 released November 2024

Equifax’s insights from recent financial data of construction businesses reflect similar trends. Key financial metrics (Exhibit 2) such as profitability¹, revenue and working capital² for mid to large construction businesses i.e. businesses generating revenues of more than $10.0m have either recovered or stabilised during the financial year ended June 2024 relative to prior periods. 

Exhibit 2: Margins recover relative to prior periods* 

*Data  as of January 2025

These trends are uniform across the construction sub-divisions of Building construction, Construction services and Civil construction. As a result, more mid to large construction businesses assessed by Equifax in the recent months have outlined improvement in credit risk, and a greater proportion of assessed entities have been assigned ‘low to moderate’ levels of risk compared to ‘high to very high risk’ in prior periods (Exhibit 3). 

Exhibit 3 : Reducing proportion of businesses rated high risk to very high risk*

*Data  as of January 2025

Furthermore, Equifax notes that the financial performance of several larger businesses with revenue of more than $200m has benefited from the recycling of their order books, where profits from new orders at current market prices offset the sub-par profitability of older projects impacted by inflationary pressures from resource constraints and supply chain disruptions. An aging analysis of the order book of select large construction companies reveals a drop in the proportion of older projects (more than 12 months) remaining incomplete around June 2024 (Exhibit 4). 

Exhibit 4: Median proportion of ongoing contracts older than 12 months drops significantly compared to prior period*

*Data  as of January 2025

While the impact of inflationary pressures and supply chain disturbances on project cost escalations appears to be waning, the construction industry continues to be exposed to ongoing financial and counterparty risks. For its counterparty assessments, Equifax also assigns a commitment rating, which reflects the risk associated with funding, execution and concentration of a specific contract relative to a firm's financial and operating capabilities. In recent periods, Equifax has observed an increase in the number of businesses receiving lower (higher risk) commitment ratings relative to their corporate ratings (Exhibit 5). 

Exhibit 5: Proportion of businesses receiving lower commitment rating for counterparty engagements remains high*

*Data  as of January 2025

While historically, only 1 in 20 (2021 and 2022) businesses received lower commitment ratings, the ratio in the last two periods has increased to 1 in 12 (2023 to 2024) on average. This indicates that a greater proportion of businesses are exposed to higher levels of concentration risks that are disproportionately impacting their commitment ratings.  

In addition, data from the Australian Bureau of Statistics (ABS) also suggests ongoing conditions for construction businesses remain tough. ABS defines a surviving business as a business on the ABS register that is active at 30 June of the reference year and was also active at 30 June of the previous year. Over FY21 to FY24, the survival rate of businesses employing 5 or more FTE’s has dropped substantially (Exhibit 6). 

Exhibit 6: Survival rate of construction businesses employing 5 or more FTE’s  has dropped substantially*

*Source: ABS

On a similar note, Equifax has observed a marked increase in the median age of businesses rated for counterparty engagements (Exhibit 7) reflecting that the younger businesses may be the ones less resilient to industry headwinds. 

Exhibit 7: Marked rise in the median age of businesses rated for counterparty engagements (Years)*

*Age is computed as the period between date of ABN registration and date of counterparty assessment.

The proportion of businesses rated more than once for counterparty assessments (repeat engagements) by Equifax in the recent 12 months (Exhibit 8) has also remained relatively stable. Together these two data sets hint at some survivorship bias and/or potentially a hesitation among clients to switch from previously tried and tested contractors. 

Exhibit 8: Relatively stable proportion of businesses assessed more more than once for counterparty engagements

Thus an increasing number of businesses receiving lower commitment ratings and potential survivorship bias suggest that the construction sector remains vulnerable to financial stress. Credit rating reports that include an in-depth analysis of industry, financial and business risk factors help uncover early signs of stress and thus should form a key component of the due diligence process for engaging counterparties. 

Credit ratings can only be provided by licensed and regulated agencies, which in Australia include Equifax Australasia Credit Ratings Pty Ltd (Equifax), Moody's Investors Service Pty Ltd, S&P Global Ratings Australia Pty Ltd and Fitch Australia Pty Ltd. 

^{1  Profitability / Net Profit Margin%  is calculated as Profit before Tax/Sales as a percentage} 

^{2 Working Capital is calculated as Current Assets - Current Liabilities}