Minimising the Impact of Construction Downturns

riskThe latest Australian Bureau of Statistics figures show that building and construction work experienced an overall rise in the June quarter. However this result can be misleading as it was the growth in the engineering sector that propped up the results.

The study found that in the last quarter, seasonally adjusted, engineering work done grew by 5.9 per cent to $23.4 billion which was bolstered by investment in the mining sector due to the high demand of Australia’s commodities in Asia.

Despite the growth in the engineering sector, residential work fell by 4.1 per cent to $11.4 billion. This result, for a key element of the domestic economy, has the industry nervous.

Ben Jarman, economist at JPMorgan, told the Sydney Morning Herald “The corporate sector and mining industry are in expansion mode whereas the household sector is just holding steady. A lot of weakness seen on the building front is the fact that the household sector is subdued.”

In a recent speech, Reserve Bank of Australia’s deputy Governor Ric Battellino mentioned “the divergence between the mining and non mining sectors of the economy has increased. The mix of growth and inflation has turned out to be less favourable than expected a year ago – i.e. there has been less growth but more inflation.”

As a result it is the construction and building industry that has been hit the hardest. In July alone 85 New South Wales and Victorian companies either entered administration, liquidation or were hit with a wind-up notice.

Master Builders Australia chief economist Peter Jones says that “uncertainty over where the economy is headed is not helping the sector, which has a higher number of SMEs than in other sectors.”

According to an industry expert, the building sector has always been a main stay in the collapse lists but numbers have been rising over the last three to five months. He says that while other industries might continue to limp on, small tradies may not have the ability.

To help minimize the impact on businesses, insurance cover is fast becoming a necessity.

Director of Trade Credit Insurance at Honan Insurance Group, Terry Phillips, suggests that if businesses, particularly small businesses are experiencing cash flow problems they need to be open and honest with their suppliers. If they expect their suppliers, particularly those that may hold Trade Credit Insurance policies, to extend credit or allow a little more time to pay accounts they need to keep their suppliers fully informed so that they in turn can keep their insurer up to date.

Trade Credit Insurance covers businesses primarily against loss when one of their customers is unable to pay for goods supplied on credit because they have become insolvent

Mr. Phillips suggests that in these difficult conditions all businesses need to protect their credit rating by ensuring accounts are paid strictly within agreed terms, and they protect their cash flow by ensuring that their debtors pay them within agreed terms and that they have strong formal collection procedures that they apply rigorously.

By: Alan Taylor
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