Credit Management in the Construction Industry – an overview

Construction is the third largest industry in Australia for the number of people it employs and its GDP (Gross Domestic Product) contribution. However, it is the second largest industry when it comes to corporate insolvencies, with an average of 1,552 per annum. Understanding the nature of the industry is extremely important for effective credit management.

Industry Overview

The Construction industry generates around $360 billion in revenue, producing approximately 9% of Australia’s GDP. It has a projected annual growth rate of 2.4% in the next five years. In 2019, over 1.15 million people were employed in construction (that’s 9.0% of all jobs in Australia). A further 118,800 jobs are projected to be added by May 2023. This means we will witness a 10% rise in employment in construction. “The Australian construction industry is expected to rebound in 2021 and grow by 2.6% in real terms, having contracted by 6.6% in 2019, with an estimated fall of 4% in 2020”. Source: BUSINESS WIRE – “Construction in Australia States and Key Trends and Opportunities to 2025” Of the 360,000 individual construction businesses in Australia, over 90% are small companies. Small businesses are the fuel that drives growth in the construction sector.

Industry profitability

Competitiveness in the Australian building and construction industry creates a low profit environment for all participants, particularly for tier 1 builders offering essentially undifferentiated offerings. A number of years ago Melbourne University and Deakin University conducted an analysis of the profitability of a sample of large commercial builders based in Victoria. The survey confirmed “that net profit margins for these companies are 2 and 3 percentage points of total revenues – wafer thin.” The table below shows profit margins in the construction industry at 2009/2010 (Source ABS).