Posted by Ben Robertson | 13 August 2021 | Business Structuring
CFO Centre’s CEO David King: Welcome everyone to a joint webinar hosted between the CFO Centre and the Nexus Law Group.
Today we’re having a discussion around the construction industry and specifically around the state of that industry given the pandemic that’s been ongoing now for some 18 plus months.
I’m David King the CEO for the CFO group across eastern Australian and New Zealand and today I’m joined by two panellists.
We’ve got Elechia Jones:, my regional director based near me in Newcastle New South Wales. Elechia is the regional director for the greater northern New South Wales area encompassing Newcastle and the Hunter and also has a number of construction clients within her portfolio.
And also today we’ve got Ben Robertson from the Nexus Law Group. Ben is their National Practice Director for construction and infrastructure and has got much experience in that industry, from having acted for developers, builders, subcontractors and property owners in relation to Construction Law matters.
So welcome Elechia and Ben.
CFO Centre NSW Regional Director Elechia Jones: Thanks David.
Nexus Construction National Practice Leader Ben Robertson: Thanks David, good to join you.
David: Great well we’ll get started. There are a couple of questions I wanted to run through today. Now obviously COVID’s had a global impact on all areas of business and domestically here around Australia we haven’t escaped that economic impact.
Elechia: Yeah sure David, thank you.
So, the industry’s actually been a little bit bittersweet. So, I’ll start with the sweet impact. We’re had a lot of the residential construction owners have an influx of people coming and getting quotes for their homes. Whether it be for private use and or some investment properties and that’s mainly driven by the grant that was given out by the government last year being the home builders grant.
And then also they’ve got a little bit of excess cash in their wallet because they can’t do any international travel and sometimes no domestic travel, so they’re wanting to put it into an investment that will give them a return down the track.
So there the sweet things. So then we start with the bitterness of the bittersweet.
So unfortunately, 2020 didn’t start off as a very good year for the industry at all, we had the fires down in New South Wales and Victoria we’re it wiped out 30% of the timber supply for the industry And unfortunately straight after that they had the floods in Queensland where they weren’t actually able to get into the forest to get the timber out, or the trees out and then to mill the timber that was required for the industry.
So that’s just actually one part of the impact that they’ve seen.
So that’s actually caused a disruption in the supply chain. So material shortage is becoming a daily occurrence in all of the construction industry and this has led to slower build times and also reduced margins as the prices are increasing month on month because of the supply shortage. And because of the slower builds it’s also leading to longer cash cycles and this is putting a strain on company’s free cash and impact their ability for them to pay their supplies.
One of the other issues that are actually coming up is the limit that the HIA are actually giving for their home warranty insurance as well. So their having to go and actually ask the home warranty insurance for an increased limit but they aren’t actually able to back that up with the supporting documentation because they are not getting the builds through as quickly as they would hope.
The last thing that I’m going to bring up is that the bank are actually impacting on the cash flow as well. So what they’re actually doing is they’re dictating to the builders what the payment terms are for the progress payments so what I mean by that is they would usually do payments at frame stage and then roof stage but the bank is saying to them no we’re going to pay both frame and roof at roof stage. So therefore they are having to outlay all this cash and then not get paid for it until roof stage.
So that’s some of the things that my clients are actually facing.
Ben: Look, my clients have been experiencing a lot of those issues that Elechia was talking about David. I mean the Construction sector is a really important driver for the Australian economy and the New South Wales economy.
And as a consequence, we saw in 2020 some of those incentives and support schemes put in place to mitigate some of the effects of covid that we that we saw since it first came on our shores around about March 2020 was that was the first lockdown. So, construction in New South Wales was able to trade through, albeit with those restrictions on the industry that Elechia discussed. What we saw then was some of the larger builders with a pipeline of work were able to weather that storm in 2020 a bit better than some of the smaller operators and the subcontractors which were initially hit the hardest in the industry.
The Job Keeper Scheme in 2020 really helped to support those businesses that were struggling and we also saw some changes to the thresholds for creditors statutory demands, that was in place from March 2020 until 31 December 2020, where we saw an increase the statutory minimum that you needed to reach before you could serve a creditors statutory demand increased from 2K up to 20k and time for companies to respond to it, a creditors statutory demand, increased form from 21 days to six months so that really assisted those companies with debts to trade through what they were experiencing in 2020.
Ben: Well, 2021 were really seeing that impact on the supply chain increasing more and more. So timber prices are escalating for those reasons that Elechia outlined initially. The timber has to be imported from North America and from New Zealand so unless you are a large player with a fair bit of purchasing power it can be difficult to get the things that you need, such as timber when you want to get it.
That’s seen some of the builders even some of the larger volume builders shift from just purely timber frame constructions to more of a hybrid between timber and steel. That has also seen some of the builders with relationships with suppliers looking to improve on those relationships so that when they want to get supply of a material it’s there on hand. So it’s really around planning out the jobs and planning when you need the materials and in some cases probably taking a little bit of a punt.
We’ve seen steel rise as well, we’ve also seen interesting things, like the Australian Financial Review reported that waffle pods are becoming difficult to get, now you wouldn’t have thought that in 2020 because waffle pods are manufactured in Australia but the polystyrene that they use comes from overseas. and I understand that Polystyrene is being diverted into other things, like packaging for your flat screen television and what have you, because I think fast moving retail was one of the beneficiaries in 2020. So, there is shortage of things that are probably difficult to plan for that wouldn’t have been on the radar.
Of course, we had lockdowns last year in Victoria and people still managed to trade, the construction industry still continued to trade, albeit with restriction and we had some restrictions in New South Wales as well in terms of the guys on the job site and planning etc, but we’ve really seen this year that lockdown towards the last half of July ,that was a massive impact on the construction industry and albeit that that lockdown has been lifted we still see the flow on from that because there is 9LGA’s now that are locked down and there is a restriction on the trades coming out of those LGA’s to work in other parts of greater Sydney.
So, the trades that can come out, are trades that have been vaccinated or if they’re in the process of getting vaccinated and they’ve had their first shot but not their second shot then there’s an allowance for them to leave if they return a negative test. So that’s had a knock-on effect in terms of, while the restrictions are lifted a great bulk of the work force does come from those LGA’s which are in Western Sydney.
I’ve even had clients in Newcastle impacted by that lockdown and restrictions on Greater Sydney because they had trades coming up from the Central Coast to work in Newcastle and the regulations are just so confusing that a lot of the trades did not want to get the covid tests to work in Newcastle. So that really restricted labour in Newcastle. So, look those are the kind of things, the flow on obviously that that has is impact on site times, liquidated damages for the builders moving forward.
Elechia: Yeah sure, I can definitely echo what Ben has said, because it’s been felt across the whole industry. But their ability to adapt to ever changing norms has actually become something that they’re getting used to, so managing their builds a lot closer than they ever had before, so creating new relationships with those supply chains as well as Ben did say, strengthening those so that we can actually get the supply that they need to continue with the build.
Making sure that they’re not using the same suppliers that they have just because they have always used them, making sure they are getting out in the industry and getting different quotes for different parts of the build and then starting that relationship from there.
I’ve seen that they’re actually starting to work closer with their CFO or their finance team to manage their cash flow. Due to the slower builds their available funds to cover the ever-increasing costs incurred including the overheads is quite important for them to continue trading.
And then also I’ve implemented into my own clients’ organisations is a monthly meeting so go through their P&L, their balance sheet and their cash flow and we actually have a look at each job one at a time just to make sure that those increased material cost are not eating away at their margins too much.
So making them aware of what they need to be looking at. And one of the things that my client has actually done is instead of doing their scheduling manually they’ve now brought it into like, I’m going to say ERP system but it’s not quite, but they’ve brought it into an online system where now everybody can see the scheduling so that they don’t have to rely on that one person.
Elechia: Yes absolutely. So as I said just now utilising their current software. So not just for scheduling, making sure that they’re doing job costing, but when they are using the scheduling tool if we were to have an episode where they were being told that they can’t have, let’s just say, the plumber and the electrician on site one time it allows them to then forecast how their actually going to build the home without having that impact, but then also knowing what it’s going to do to your cash flow.
Having your cash flow forecasted, I keep saying cash flow because cash flow is King, it is something that people think is just a saying but it is actually true. They need to be managing their cash flow. So having that cash flow mapped out and making sure that if there is any economic impact they can put it into the forecast and see what actually happens at the end. Also having the ability to do some sensitivity analysis so if they were to have a job that was impacted what does that specific job due to their cash flow, if they have five that are impacted what does that do to your cash flow.
And last but not least definitely job costing, make sure that you’re doing costings per job because otherwise you’re not going to know where your margins are and then you’re going to end up in trouble at the end of the day.
Ben: I think some of the guys that hopped on very early in the piece David to plan during the contract negotiations of new jobs for some clauses that would deal with Covid if it indeed got worse, which regrettably it has, so mitigating the impact Covid has on things like materials and labour and time that was really important and principals are quite open to those discussion in my experience. Some of them is a little push back but, but eventually the reasonable party will see that it’s a risk that is in everyone’s interest to be managed because a lot of the contracts from 2019, 2018, 2017 may not have had clauses that responded to what we’re experiencing at the moment and it’s a little bit like sticking a round peg in a square hole to torture an analogy. But that was really important.
Some of the contactors are looking to incentivise their trades that they work with moving forward. So, looking at rewarding trades that are sticking with them and have worked with them over a number of projects. Those kinds of incentives sometimes work with some trades. And where contracts don’t respond well to covid or indeed even sometimes when you do have a contract that has a covid clause, sometimes it’s worthwhile having a chat to the principal and a negotiation with the principal off contract to have a crisis negotiation, to work out a way forward, sometimes renegotiate the existing relationship to deal with the impact that it’s having on your materials and your labour and your project delivery. Because some things a very difficult to anticipate, like the waffle pods for example. So, some things just pop out which are difficult to risk manage, albeit that if you really turned your mind to it early in the piece you probably could craft a decent covid-19 clause that could respond to shortages in supply.
By and large I find with my clients and generally the construction industry players that their solution and goal-oriented pragmatic people that want to solve issues. So the construction industry players are usually quite adaptable when they get these difficult circumstances and they can be quite open to negotiate, because no one wants a job where the contractor is pushed into insolvency and the job doesn’t get delivered. So by and large people are willing to work together to find a solution that helps everyone.
Ben: Look, I think moving forward definitely reviewing the contract suite that they use and turning their minds very carefully to contract negotiations where contracts are proposed by someone else.
Aligning the contracts as well so that the head contract is aligned with the subcontract and with the supply contracts. That should in the ordinary course happen in any event but these kind of things like Covid should focus everyone’s minds on that.
Recently I’ve seen businesses consider whether or not employees can be incentivised to go out and get vaccinated as well. So, the Therapeutic Goods Association has some guild lines for employers to follow in that regard and it’s probably a good idea before you roll out an incentive scheme to have a chat to your employment lawyer or whoever does your legal work, because there are some things that people need to consider when they are rolling out those kind of incentive schemes.
And Companies that are struggling financially through these times should take the opportunity to consult their financial advisers and their legal advisers at the earliest possible opportunity to manage a way though that financial difficulty rather than the ostrich syndrome of burying your head in the sand which often will only make the problem worse.
So those are some of the things to look for.
Elechia: Yeah, definitely David.
I think they should be looking at the Federal and State assistance that they can bring on board whether that be the Job Saver Payment, COVID-19 business support grants, payroll tax wavers, the micro business grants.
They should also be contacting their bank in relation to any support that they can offer whether it be a deferral of loan repayments, a temporary overdraft. That would definitely help them if they are in any kind of cash flow trouble.
Lastly, speaking with your Finance team, whether it be a CFO or finance manager as Ben was saying, I think the earlier you do that the better outcome you’re going to have at the end of the day.
Elechia: Yeah, having a look at your current systems and see if you can utilise them any further to you assist with budgeting or Job profitability.
I can’t stress it enough, cash flow, cash flow is king, I’ve said it before, and I’ll say it again. Making sure you’re doing the forecast for those and plan, plan, plan, make sure you’ve always got a plan in place.
David: Yeah, great advice. And Ben, anything further for you.
Ben: Look, just to emphasise, I think contracts need to be looked at to really examine where the risks sits, who wears the risk if there’s a COVID event that affects the job.
Covid is likely to be around with a us for some time, we’re seeing more and more people vaccinated which is a good thing but who knows how long Covid’s going to hang around for or what new variants will emerge, so I think that needs to be considered in terms of risk managing jobs.
There’s likely to be an uptick in the kind of disputes that that we have, which will just ordinarily come to pass because people are having to stick round pegs in square holes. So, it’s likely that there will be some disputes, so consult your legal advisors at the earliest opportunity before you pull the trigger on a on a strategy.
And in addition, businesses should look at the insurance policies they they’ve got, if they’ve got a business interruption policy there is a possibility that could respond to a Covid type shut down. A lot of these business Interruption policies try to exclude pandemics and there is a huge amount of policies on the market that were written with the old legislation in mind not the current legislation that we’re operating under.
There was a test case run in the court of appeal and the insurers lost that test case and it was found that they couldn’t rely on that exclusion clause. They took it to the High Court and weren’t granted special leave to appeal to the high court. So, currently were seeing in the federal court system some more test cases play out in relation to those insurance policies but there may well be timing provision, time bar provisions that apply under the insurance policies generally so it’s important to just review that.
So speak to your insurance broker or your lawyer in relation to coverage under the insurance policies that you’ve got and just generally just be mindful of any time bars that you’ve got under the existing contracts you have, so that any notification in relation to extensions of time or if you’re lucky enough to have a contract where you can claim costs as a result of a Covid delay then putting in a claim for compensable damages under your contract as well. Because a lot of the contracts in New South Wales are negotiated with time bars in place, so it’s important that you don’t miss a time bar and get locked out of an extension of time claim or a compensative damages claim.
David: Absolutely, great stuff.
Look there’s a lot in there and a lot going on for a business owner and its management team in the construction industry, a lot to grapple with on top of all the day to day stuff that they need to do just to get things done. So, I think one of the underlying things from today is get the right advice from the right people at the right time, have a plan and make sure contractually, legally, from an insurance and risk perspective as well as from a financial and cash flow one that you’ve got the right support because you can’t do it for yourself.
And finally in terms of reaching out to us, if you’ve got issues or things on your mind, whether it’s from a legal perspective you’ve got Bens details there, if it’s from a planning and financial management perspective you definitely got Elechia and myself at your disposal very happy to take a phone call just talk things through.
And if between the three of us we haven’t got the answer or we’re not the right solution for that particular issue or opportunity then there’s a good chance we probably know someone that we can point you in the direction of.
So thank you Ben, thank you Elechia for you invaluable insights today. I appreciate your time and I hope everyone in the construction industry that sees this got some good value out of it.
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