Families urged to check their builder as construction companies hit the wall
11 September 2008
The collapse of hundreds of home builders across the country has left thousands of Aussie families out of pocket or with unfinished homes and the pressure is set to continue with around one in ten home builders rated a high risk of experiencing financial distress in the current financial year.Research by leading credit reporting agency Dun & Bradstreet (D&B) reveals that more than 200 residential construction companies failed in 2007, a failure rate for the industry which is double the national average. Young companies in particular experienced a significant failure rate with around fifty per cent of those that entered external administration younger than ten years old.
Yet for many of these failed companies there were early warning signs. Previous court actions and collections, poor payment habits and Directors who have been associated with previously failed companies are all signs that a builder may be at risk of financial distress. For families looking to build their own home, understanding these warning signs is critically important.
Further research by D&B which examined these warning signs reveals that nine per cent of the home building companies still in business are rated a high risk of experiencing financial distress or failure in the current financial year. This equates to a two per cent increase in the high risk category since 2006 and a three per cent increase in the moderate category over the same period.
Companies rated a high risk of experiencing financial distress (%)
According to Christine Christian, D&B's CEO, Australia's mums and dads need to ensure they conduct thorough checks on their builder prior to appointment to ensure the Australian dream of building a family home isn't left in tatters.
"Mums and dads are already facing pressures managing the family budget as the cost of essential items continues to escalate," said Ms Christian.
"Those that have managed to save the funds to build a family home amidst these tough conditions must ensure they conduct thorough background checks on their chosen builder to avoid the pain and cost associated with an unfinished home. Consumers can pay up to twice as much to finish a housing project if a builder is forced to walk away.
"There have been a number of high profile collapses this year and with current economic conditions posing many challenges it could not be more important that Australian families do their due diligence before signing a contract."
Figures from the Reserve Bank and Bureau of Statistics reinforce reports of a downturn in the sector, with home lending growing at its slowest rate in 16 years and the number of new loans for owner-occupied housing falling by an unprecedented 25% in the four months to the end of May.
June quarter trade payments figures further reinforce the pressures facing the sector and the need for families to be aware of the early warning signs of distress.
The average payment time for Australia's residential builders was almost double the standard payment term at 59.7 days. Those companies with 50-199 employees and those based in Victoria appear to be facing the greatest cashflow issues and as a consequence they are hanging onto their cash for longer. The 50-199 employee category took 82.7 days to settle accounts in the June 2008 quarter while Victorian home builders took 69.1 days.
Payment terms - residential construction sector
Another indicator of potential trouble that Australian families should be aware of is the history of company directors. D&B research reveals that the risk of company failure doubles for directors who have been on the board of a previously failed company, a trend which has been evident in recent high-profile collapses.
There are a number of factors that mums and dads need to look out for when building the family home. The following check-list can help to protect Australian families from the burden of builder collapse:
- Is the builder a registered business and is it financially viable? Find out by conducting a simple credit check through a registered credit bureau
- How long has the builder been in business? Younger builders have a higher failure rate and are more likely to experience financial distress in the coming 12 months
- How big is the company? Don't assume that big means safe - up to 3% of larger residential building companies failed in each quarter of 2007
- Does the builder have home warranty insurance? Insurance rules differ across the country, make sure you understand the entitlements applicable in your state
- Have complaints been registered against the builder? Contact Fair Trading to check that your builder is complaint free
- What are the terms of the builders guarantee? Is the agreement fair and satisfactory?
- Is the builder affordable? Be sure you understand all the costs listed in your contract, don't get caught by hidden fees and charges
For further information please contact:
Danielle Woods
D&B PR Manager Australia & New Zealand
(02) 8270 2926
About D&B
D&B is the world's leading provider of business-to-business credit, marketing and purchasing information and receivables management services. D&B manages the world's most valuable commercial database with information on more than 130 million companies.
Information is gathered in 193 countries, in 95 languages or dialects, covering 186 monetary currencies. The database is refreshed more than one million times daily as part of D&B's commitment to provide accurate, comprehensive information for its more than 150,000 customers.
The Australasian operations were bought out by the senior management group in August 2001. It was the first MBO of a wholly owned subsidiary in D&B's history worldwide.
Today Lazard Carnegie Wylie owns an approximate 90% stake in DBA and the local management team a 10% stake.
Strategies for future growth include developing DBA's commercial and consumer credit referencing business; expanding its receivables management outsourcing business; maintaining its lead in the development of unique credit and risk scoring products; and developing new products specifically tailored to the Australasian market. DBA currently employs over 500 people in Australia and New Zealand.
