The Truth Behind Failed Building Companies

We’d always been baffled by the huge amount of bad debt that racked up by building companies that went into receivership.

In theory, if they paid their suppliers net monthly, and their subcontractors within 14 days, then assuming a 50:50 split between the two would mean they would only ever owe around 1/12th of their revenue (or 8.33%) while they were trading solvent.

Even if they were trading insolvent and payments were being made after 90 days and 30 days respectively, that would still mean they only ever owed 17% of their annual revenue.

And yet typically, when residential building companies go into liquidation the amount of debt they owe is around 40% of annual revenue which is quite staggering!

Recent examples that demonstrate a trend that has been occurring in the industry for decades are Total Lifestyle Builders 38%, MJM Projects 41% and BA Murphy 41%.

Forty-one per cent of revenue is the equivalent of being four months overdue on all supplier and subcontractor invoices.

Clearly, this is not a situation that could have happened overnight, or even within a few months. Meaning these companies that fall over owing huge amounts of money were almost certainly trading insolvent for a number of years before they collapsed.

However, look at any liquidator’s report on a failed building company and that is exactly what they expect us to believe! Time and time again we see the same explanation from a forensic accountant who states, ‘The company was trading profitably until recently when losses started occurring due to….’

At this point, any number of far-fetched explanations are inserted in order to try to explain how a building company suddenly went from making money, to losing millions of dollars in a short space of time.

It’s pretty obvious that there is something else going on.