Risk management and financial planning in construction

26 April 2023 Consultancy.com.au 4 min. read
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The construction industry has faced significant challenges in recent times, including rising costs, increased competition, and a tightening credit market. The collapse of several prominent construction businesses in recent months has had a significant impact on the industry and the broader economy, emphasising the need for businesses to take a more proactive approach to risk management and financial planning.

In March, company collapses soared more than 20 per cent across Australia, as the construction sector bore the brunt of unprecedented tough conditions. According to Australian Securities and Investments Commission data there were 549 administrations and liquidations in March, up almost 23 per cent from a year ago.

While the Government has implemented several grants, such as the HomeBuilder grant and the $15 billion National Reconstruction Fund, to support construction businesses and workers, businesses can also take a proactive approach to overcome these challenges.

Risk management and financial planning in construction

Johanna McCartney, Director of Accounting at multidisciplinary advisory firm, BlueRock says, “The industry needs to take a more strategic and forward-thinking approach to risk management, financial planning, and operational management. By forecasting and managing for a range of scenarios when commencing a project and investing in appropriate software solutions to manage their operations effectively, businesses can make informed decisions and respond quickly to unexpected events.”

McCartney shares five ways how construction businesses can future proof their business:

Prioritising risk management and financial planning

If there is one key learning from the flurry of collapses, it is the need for the industry to take a more proactive approach to risk management and financial planning. Construction businesses should ensure that they have adequate cash flow, manage their debts effectively, and maintain strong relationships with subcontractors and suppliers.

Businesses can also mitigate risk by diversifying their portfolio and investing in multiple projects rather than relying on one large project. This approach can help to protect against potential project delays or cancellations and maintain a steady cash flow.

Further reading: Australian infrastructure investors exposed to most financial risk.

Forecasting for a range of scenarios 

It's crucial to forecast and manage for a range of scenarios when commencing a project. Construction businesses should consider factors such as the availability of resources, potential project delays or cancellations, and market changes that may impact the project's cost or timeline.

Forecasting and managing for a range of scenarios can help businesses to stay on track with the project and minimise the impact of unexpected events.

Apply for government funding

The National Reconstruction Fund offers a lifeline to construction and property businesses that have been affected by natural disasters and are struggling to stay afloat. These businesses can apply for funding from the Fund to cover the costs of rebuilding damaged infrastructure and any additional costs.

The Fund provides an opportunity for construction and property businesses to focus on building structures that are designed to withstand natural disasters. By doing so, they not only minimise the impact of future disasters on communities but also position themselves as experts in the field of disaster-resilient construction. This approach can create a competitive edge for these businesses and help them to thrive in the long-term.

Managing business operations

Managing business operations, particularly back-end such as analysis, reporting, finance, and appropriate software solutions, is crucial to ensure effective management of a construction business, particularly in unprecedented times.

By using appropriate software solutions, businesses can streamline their operations, manage their finances effectively, and make informed decisions based on real-time data.

Offer training and employment opportunities

Offering training and employment opportunities can help to stimulate local economies and provide valuable skills and experience to those impacted by disasters. This not only benefits the individuals but also the construction businesses that can hire skilled and experienced workers in the long term.

Construction businesses can also partner with local schools and training institutions to provide education and training opportunities for the community. This helps to build a skilled workforce in the local area, which can benefit the construction industry as a whole.

Bottom line

The collapses of construction businesses highlight the need for the industry to take a more proactive approach to risk management and financial planning. Construction businesses should ensure that they have adequate cash flow, manage their debts effectively, and maintain strong relationships with subcontractors and suppliers to ensure they can survive – and thrive – in times of economic uncertainty.