Is The Construction Industry Recession-Proof?

As the construction industry is undergoing extreme uncertainty and the global economic trends seem to be negative the question of whether the construction industry is recession-proof or not is being posed a lot.

There is no such thing as a completely recession-proof industry and traditionally the construction industry tends to be impacted during a recession and therefore wouldn’t be considered a recession-proof industry. Or at least there are industries that tend to perform better than construction during recessions such as education and healthcare.

This is because as recession fears increase, companies decrease spending and banks lower their risk tolerances meaning it becomes more challenging to access financing. This directly impacts on the construction industry. With financing harder to access, fewer people and companies are able to fund their construction projects.

With this said, the Australian construction industry seems to be reasonably strong. Although there is no current recession, it is being touted that “it feels like one”. While construction company collapses have been happening constantly one would think the industry is suffering. Yet this is not the case, there seems to be a never-ending demand, with new commercial and residential projects being presented every day.

So with demand not being an issue why are these construction companies collapsing so regularly? A construction business’s biggest challenge is that of cash flow. Managing cash flow is one of the most pivotal parts of running a construction business. The numbers are often astronomical and the bills are never-ending leading to one day the company seemingly being rich and the next day the company being broke. What we are seeing with these collapses however is not just a mismanagement of cash flow, but also with the drastic price increases of materials, shortage of labour, increase in the cost of labour and project delays. 

Construction companies' owners and managers aren't the only ones who need to exercise caution. Clients that have signed contracts for new homes are also at risk, particularly in light of the recent collapses of large residential builders going into liquidation. This leaves clients with unfinished homes, and although many may have insurance coverage, they still face the daunting prospect of becoming one of many creditors on a long list, waiting for completion of their unbuilt homes.

To resolve the situation, insurance companies must find new builders willing to take on these incomplete projects, which can come at a higher cost than originally anticipated. Therefore, clients should always research and choose reputable and experienced construction companies to lower their risk.

One way the Australian Government is aiming to assist is the solution of this problem is with the proposed introduction to include Project Trust Accounts for smaller-sized commercial projects is one way to project the sub-contractors and clients but can create a big problem for the builder. Tying up the cash like that will only make managing cashflow of even further importance which down the line will benefit everyone but getting to the initial point where the business has the funds to cover operating expenses and unexpected project expenses is no easy task. 

So even with these collapses and the economic downturn in full effect, demand is still holding strong. So the answer to the question of whether the constriction industry is recession-proof is - yes and no. 

The construction industry is definitely performing better than others but is still presented with many challenges. It is believed that the materials and labour issues are easing leading the chaos to settle. If these times have taught us anything it is that those in the construction industry need to be cautious, and business need to make cash flow management a top priority, having a pile of cash in the bank may seem like a waste but may be what makes or breaks a company. 

Looking ahead, it is our hope that the construction industry experiences fewer collapses and rather flourishes as it should. This industry plays a crucial role in the growth and development of Australian communities. 

It is encouraging to see the government taking positive steps to address and appreciate its value. By providing more support and incentives for businesses to maintain high standards and deliver quality work, the industry can continue to thrive and contribute to the economic growth of our country.