Expert: Early signs of construction insolvencies are present before formal process begins

The total number of insolvencies in Australia rose from 5,440 in 2022-2023 to 7,100 in 2023-24, with 2,355 of those being in construction related fields, according to data from the Australian Securities and Investments Commission (ASIC).

Hannah Griffiths, an expert in insolvency law at Pinsent Masons and the head of the restructuring and insolvency practice in Australia, said at the recent Law Review of Construction 2025 event: “There are often early signs of insolvency that present on a construction project long before any formal insolvency processes commence.”

“Some of the indicators of insolvency from a construction perspective include poor relationships with current financiers, no access to alternative finance, an inability to raise further equity capital, creditors being paid outside of trading terms, dishonouring of cheques, special arrangements with selected creditors, legal proceeding being commenced against the company, requests for changes to payment terms, high turnover of key personnel, a slowdown in work progress and failure to achieve milestones, and delays in procuring materials,” she said.

“Each of these indicators may be unremarkable alone, but when one or more indicators emerge at the same time, then contractors should be cognisant that there may be a larger issue brewing in respect of the subcontractor’s insolvency.”

More than 3217 construction firms went into external administration in the 2024 calendar year, compared to 2546 in the previous twelve months, according to ASIC.

Griffiths said: “One key lever for contractors to employ is cooperative and early engagement with insolvency professionals.”

“There may be an opportunity of directly re-engaging a provider to the project site and cutting out the subcontractor in the middle to minimise business interruption and keep the project on track,” she said.

“There could also be an option of directly employing employees of the subcontractor to continue project works. The insolvency practitioner may also be prepared to maintain and support existing project management teams and continue to perform the relevant contracts.”

Bank guarantees remain crucial to managing insolvency risks, alongside ensuring that there is an active management of the progress of construction works and services, placing the insolvency practitioner on notice of any security registrations, and an early assessment of any defaults under contracts for reasons other than insolvency, according to Griffiths.

“Many of these levers can be deployed concurrently to assist manage insolvency in your supply chain,” she said.

“Every insolvency is fact specific and will depend on the key concerns for any given client, however, if you are able to identify the early indicia of insolvency and develop a crisis response plan with your legal advisors using some of key levers, there is a strong likelihood that any insolvency that you experience in your supply chain will be effectively managed and you will not experience the consequential business interruption that otherwise would arise.”