The Australian economy is experiencing a dramatic spike in construction insolvency levels, with the number of failed businesses in the industry surging by 18%in the past year.
According to the latest statistics from the Australian Securities and Investments Commission (ASIC), 2,636 construction companies became insolvent for the first time, in the financial year to March 2025.
These numbers lead to some burning questions. Which construction companies are being affected? What are the underlying causes? Crucially, what needs to be done to stabilise the situation? Let’s dive in and explore some possible answers.
Which companies are being affected?
While insolvency can occur to a company of any size, small businesses tend to be more vulnerable. This is because they have less cash flow to mitigate disruptions, are often underinsured, and have less access to the specialist legal advice needed to deal with the early stages of insolvency.
What’s causing the construction insolvencies?
In truth, there’s no simple answer to this question. However, here’s a breakdown of some underlying causes, all widely accepted as being major factors behind construction’s recent spike of insolvencies:
Supply chain issues
Supply chain issues have been a big talking point in the construction industry for the past few years. In part, the insolvency surge can be attributed to businesses struggling to find materials at prices that don’t severely eat into their profit margins.
Construction materials readily available before the pandemic are now difficult to source. When found, they often come with long lead-times and eye-watering price tags. Subsequently, contractors are struggling to meet project budgets and deadlines, while bottom-line profits are dwindling.
Labour shortages
The scarcity of skilled labour has been a significant obstacle for Aussie construction firms in recent years. Master Builders Australia has urged the government to boost the construction workforce by enhancing mentoring opportunities and incentives to attract talent to the industry.
Rising interest rates
The recent increase in interest rates, aimed at curbing inflation, has dramatically affected the demand for new homes. Rising costs of loans, materials and labour have made things challenging for many businesses.
Fixed-price contacts
Another of the biggest contributing factors is the number of fixed-price contracts signed in recent years. The pandemic’s stay-at-home lifestyle saw a boom in demand for renovations, house extensions and new properties. Simultaneously, government-backed schemes such as HomeBuilder increased the number of projects funded by first-time homeowners. Construction companies must now deliver on a backlog of fixed-price contracts agreed between 2020-2022, even though increasing costs of materials and labour mean these projects offer drastically reduced profit margins. Master Builders forecasts anticipate that 1.03 million homes will be built in the five years from 1 July 2024, a shortfall of 166,000 relative to the government's 1.2 million target.
How can construction rebuild?
Based on insolvency data alone, it’s tempting to believe that Australian construction is collapsing. However, while insolvency figures are high, the outlook for the industry is overwhelmingly positive. Financial reports lodged in 2024 show that the country's biggest builders enjoyed a strong turnaround with profitability and margins increasing.
While construction challenges are undeniable, each of these challenges represents an opportunity for the industry to evolve and improve. As it moves beyond the insolvency crisis, Australian construction has a chance to rebuild its foundations, remodel the management of its pipeline and become more resilient in the face of change.
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