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How do successful construction businesses manage cash flow and avoid becoming a statistic?
‘Inadequate cash flow or high cash use’ was the leading cause for the failure of construction businesses in the latest Australian Securities and Investments Commission (ASIC) Insolvency Report (FY: 2018-19) and has been the most ‘nominated cause for business failure’ in seven of the last ten reports produced by ASIC.
So, how do successful construction businesses manage cash flow and avoid becoming a statistic?
While it is not possible to predict all the challenges of a project, it is possible to be well-prepared and reviewing your systems regularly to identify opportunities to improve cash flow is key.
Acquiring the work
Doing the work
Tracking the work
Making sure you can enforce your right to be paid is an important part of managing cashflow. You can refer to the QBCC’s Industry Guide to Security of Payments Law for more information including how to make sure you issue a valid payment claim.
There are many free resources available to help businesses improve their financial management and avoid cash flow problems:
Cash flow is one of the fundamental elements of financial management that all QBCC contractors are required to provide details of as part of their financial reporting each year.
Annual financial reporting is part of the Minimum Financial Requirements legislation. It helps to ensure every building contractor who operates in Queensland has a financially healthy business with an appropriate level of working capital, with the goal of reducing the incidents of financial failure, liquidations and bankruptcy.
Almost $4 million in outstanding debts was returned to subcontractors and suppliers last financial year, thanks to Queensland’s building industry watchdog.
Of the 759 monies owed complaint investigations completed during the 2020/21 financial year by the Queensland Building and Construction Commission (QBCC), debts owed to subcontractors and suppliers totalling $3,869,077.96 were paid.
QBCC Commissioner Brett Bassett said it was important subcontractors were confident they would be paid for work they did.
“Our free monies-owed complaints service is available for the industry to use, and these amounts may not have been paid had the QBCC not been contacted,” he said.
“We have implemented a number of initiatives where we look at the licensees, industry compliance with security of payment and take appropriate action where necessary to ensure our trades are being paid.
“The monies-owed complaint service is just one of these tools, helping to ensure tradies get paid for the work they do.
“Failure to pay can lead to costly legal proceedings or potential licence suspensions and cancellations for QBCC licensees.”
Under law, it is a minimum financial requirement that QBCC contractor licensees must pay a debt owing to a subcontractor or supplier in relation to the performance of building work on or before it becomes due and payable.
Mr Bassett said it was important to always have a contract in place with a subcontractor or supplier and if monies weren’t paid, a payment schedule should be set up in accordance with the Building Industry Fairness (BIF) Act 2017.
Between October 2014 and June 2021 approximately $38.96 million has been recovered by the QBCC via the monies-owed complaints service since the minimum financial requirements policy began.
Mr Bassett said educating the industry on improved payment practices was a win-win for everyone.
“QBCC does rely on industry information, therefore any subcontractor or supplier who is legitimately owed an undisputed debt is encouraged to lodge a monies owed complaint via QBCC,” he said.
Queensland building and construction companies have improved their equity by more than a billion dollars since the building watchdog’s annual reporting regime began.
The latest action from last month saw two companies issue shares and raise a total of $57 million between them, taking the total working capital injected into Queensland building and construction companies up to $1.366 billion.
The annual reporting laws administered by the Queensland Building and Construction Commission (QBCC) require all building and construction licensees to operate financially viable companies.
The laws, introduced by the State Government in January 2019, are part of a suite of reforms that work to improve security of payment in the industry.
QBCC Commissioner Brett Bassett said that ensuring companies were financially viable meant a sustainable industry.
“When a homeowner enters a contract with a builder for a renovation or new build, they expect that the builder is financially viable to finish the project,” Mr Bassett said.
“When a sub-contractor issues an invoice after months of hard yakka, they expect the builder to be able to pay the amount,” he said.
“In the past we’ve seen too many incidents of insolvency in the building and construction industry, and the annual reporting laws give the QBCC insight to help prevent these.
“If licensees want to operate in this industry, they must be able to remain financially sustainable and financially healthy.”
Mr Bassett said the asset improvements included cash injections, share issuances and reductions in related entity loans.
“The two latest companies to increase capital, takes the total to 16 companies which have increased their working capital by more than $10 million,” he said.
“While there is no law that can provide an iron clad guarantee against business failure or financial mismanagement, people who invest in Queensland and workers who establish their career in Queensland need to be given the highest possible security that Queensland has a strong, stable building industry.”
For licensees with an annual allowable turnover of more than $30 million, as at 30 June 2021, 100 per cent have lodged their annual financial information with the QBCC.
The QBCC issued 42 show cause notices for suspected non-compliance with minimum financial requirements, two licence suspensions and no licence cancellations.
The QBCC also imposed licence conditions on nine licensees in this financial category, for failure to lodge the required financial information on time.
For licensees with a turnover between $800,001 and $30 million, 99.9 per cent had lodged their annual financial information as at 30 June 2021.
The QBCC issued 48 show cause notices for suspected non-compliance with minimum financial requirements, and suspended two licensees in this bracket for non-compliance.
The QBCC also imposed licence conditions on 664 licensees in these categories for failure to lodge the required financial information on time, resulting in 147 licences being suspended and 83 being cancelled.
For the licensees with allowable turnover of up to $800,000, approximately 83 per cent had lodged their annual financial information as at 30 June 2021. As at the 1 August 2021, this now up to 85 per cent.
Licensees who are still yet to lodge the required information are in breach of the law and may find themselves facing regulatory action.
This calculator works for a maximum revenue of $800,001 and over (category 1-7 licensees).
This calculator does not apply to SC1 and SC2 licensees as they have a set minimum NTA and fixed maximum revenue.
Use this calculator to estimate either:
More than 6,400 recalcitrant building trade licensees may be forced to stop quoting for jobs, until they submit their financial paperwork to the Queensland Building and Construction Commission (QBCC).
QBCC Commissioner Brett Bassett said the total group of 6,470 licensees consisted of repeat offenders who had failed to lodge their financial information last year, and again this year.
“Queenslanders expect the QBCC to take action against those tradies who aren’t complying with the law. Taking this action helps give consumers peace of mind that when they do hire a tradie, it’s someone who complies with the law,” Mr Bassett said.
“Last year was the first time these particular licensees had to comply with the new financial requirements, and the QBCC took an educative and facilitative approach to help them understand the changes,” he said.
“For this second year, we won’t be taking the same approach, those who fail to comply must be aware that they could face the full extent of the powers available to us.
“The first batch of 90 licensees hit with conditions are licensees who have been issued with directions to rectify or had monies-owed complaints lodged against them.
“The majority of licensees have done the right thing and are supporting these changes by complying, and they’re helping improve the industry.
“Those who continue to flout the law are in the firing line for potential regulatory action that starts with licence conditions and can end with licence cancellations.”
The licensees in the spotlight are all in the self-certifying categories 1 and 2, which means they have an annual allowable turnover of less than $800,001.
This is the second year of the annual reporting process, which is part of the Minimum Financial Requirements (MFR) Regulation 2018.
Mr Bassett said the requirements helped the QBCC to monitor the financial viability of these small businesses.
Queensland’s building watchdog is about to move on licensees who have still yet to lodge their financial reporting information.
Self-Certifying Categories 1 and 2 licensees by law, had until 31 March, 2021, to lodge their financial information to the Queensland Building and Construction Commission (QBCC).
The laws are part of the Minimum Financial Requirements (MFR) which help keep the industry financially healthy, by working to reduce insolvencies and helping ensure that tradies and subbies get paid and consumers get their projects completed.
QBCC Commissioner, Brett Bassett, said that it’s time to move on licensees who had failed to lodge their financial information in time.
“We’re now in May, there really isn’t any excuse for failing to lodge the information,” Mr Bassett said.
“Since December last year, the QBCC has issued more than 10 reminders to licensees about lodging, and even undertook a state-wide roadshow to help remind people and give them the opportunity to lodge with assistance from QBCC officers,” he said.
“The QBCC has gone to great lengths to help licensees lodge, and it’s all for the betterment of the industry.
“If licensees are operating with poor financial health, annual reporting helps the QBCC to identify them and to better protect subbies, suppliers, home owners and investors from potential financial detriment.
“These licensees are the companies homeowners are likely to engage and they undertake a range of building work for Queensland families.
“We need them to be financially healthy so that, for example, they can finish the renovations or home builds they start.
“This process is important to help the QBCC protect homeowners who engage QBCC licensees.”
The Commissioner said annual financial reporting was having a positive effect on the industry’s financial health, with more than $1.29 billion worth of working capital injected into major Queensland construction companies since commencement of the laws.
QBCC figures for 2018 showed 279 contractor insolvencies in Queensland, which equated to about three contractor insolvencies per 1,000 licences.
In 2019, 221 insolvencies equated to about two-and-a-half insolvencies per 1,000 licences, and in 2020, the 95 contractor insolvencies in that year comprised roughly one contractor insolvency per 1,000 licences.
“That’s a good start and it needs to continue, and this next round of enforcement will greatly assist,” Mr Bassett said.
Mandatory annual financial reporting was introduced in Queensland via the Minimum Financial Requirements Regulation, on 1 January 2019.
The changes have the support of key industry associations, including Master Builders, Master Plumbers, NFIA and others via the Ministerial Construction Council, who in March this year vowed to encourage their members to comply with the laws.
“The vast majority of licensees, approximately 80 per cent, have done the right thing and have complied with providing the QBCC their annual reporting information,” Mr Bassett said.
“The minority who have not complied now face the prospect of regulatory action, starting from this month.”
Penalties for failing to lodge annual financial reporting, or for providing false or misleading information, include having conditions applied to a licence, or the suspension or cancellation of a licence.
BACKGROUND
QBCC licensees have been informed of their annual financial reporting requirements through methods including letters, State-wide roadshows, advertising, social media and more.
Self-Certifying Category 1 licensees (annual turnover of not more than $200,000): needed to submit annual financial information by 31 March.
Self-Certifying Category 2 licensees (annual turnover of more than $200,000 but not more than $800,000): needed to submit annual financial information by 31 March.
Most categories 1-7 needed to submit their annual financial information by 31 December.