These include high levels of competition, low profit margins, the fact that public buyers generally pay late, and a higher-than-average proportion of business failures. Long payment duration, cash flow problems, and weak financials of small construction businesses are an issue in almost every market.
Trade credit insurance protects businesses against late or non-payment from customers and contractors. For industries which require significant expenditure to complete jobs, such as construction, trade credit insurance can be particularly valuable, reducing the level of risk faced by the organisation.
Construction is a significant contributor to the Australian economy, accounting for approximately 9% of GDP. Currently, construction sector performance remains subdued, with 2017 expected to be the final year of contraction in non-residential and engineering construction. Modest growth is expected to return in 2018.
While mining-related activity could decline further this year, encouragingly, the prospects for growth in other parts of engineering and non-residential construction are improving and expected to outweigh any further contraction in mining-related work. Engineering construction output, particularly infrastructure-related projects for road and rail, largely located on the east coast, is forecast to increase about 3.5% in 2018.
Residential construction growth is expected to level off or slightly contract in 2018, as lenders are tightening terms and conditions for borrowers, particularly investors. An increase in the number of apartments and decrease in Chinese buyers is also playing a part in the slow price growth.
The two-speed economy is supported by the differences in performance and outlook of the construction market in the various Australian regions. Construction businesses in Queensland, Western Australia, and the Northern Territory, considered to be so-called ‘mining states', may struggle in a subdued market, with forecasts indicating a $7 billion decrease in construction activity in 2018. On the other hand, the South Eastern regions are forecast to maintain present levels of activities.
Payments in the construction sector take between 30 to 60 days on average, and the level of non-payment notifications remains high. The number of credit insurance claims is expected to remain elevated in 2018, which can have a significant impact on cash flow and place increased pressure on smaller operators.
Overall, construction sector performance still needs to be closely monitored given its volatility. Operators need to protect themselves from unpredictable market conditions, with trade credit insurance reducing the business's vulnerability to risk and the expense of uncollected payments. It secures cash flow by covering accounts receivable and provides important information on the solvency and reliability of possible partners and customers. Trade credit insurance lets smaller organisations trade with confidence and stay viable in a volatile market.
Mark Hoppe is Atradius' managing director, ANZ.