Entry, Exit and Insolvencies in Australian Construction

 The number of businesses is at a record high

 

 

There has been a lot of attention on the increase in insolvencies of Australian construction businesses. In 2023-2024 the number of insolvencies was 3,882, which was the highest number across all industries, and the construction share of total insolvencies was 26 percent. However, the reporting of these numbers usually does not include any context, and therefore lacks perspective, and focusing on the number of insolvencies can be misleading if industry characteristics are not also considered. 

 

This post compares the insolvencies data from the Australian Securities and Investment Commission (ASIC) with the data available from the Australian Bureau of Statistics publication Counts of Australian Businesses. The ABS data gives the number of businesses that enter and exit each quarter, and the number of businesses operating at the end of each quarter, and is published quarterly with data that goes back to June 2020 in its current format.

 

The ABS data is based on Australian Business Number (ABN) registrations and sourced from Australian Tax Office records of businesses that file a business activity statement and pay Goods and Services Tax (GST). An entry is an ABN that starts paying GST or restarts after a break of more than five quarters. An exit is an ABN that is no longer actively trading because the business has cancelled their ABN, ceased remitting GST, or the ABN has changed due to a merger or acquisition. Therefore exits occur when a business has closed, has been sold, has significantly changed structure, or is no longer operating in Australia. Importantly, insolvencies are only a small proportion of the number of exits. 

 

 

Insolvencies

 

Data on insolvencies comes from the Australian Securities and Investment Commission (ASIC). There are three data sets: insolvencies where an external administrator is appointed for the first time; for any later appointment of an administrator to that business; and for voluntary liquidations where a solvent business reports it is no longer operating. Figure 1 shows this data for three years to 2024. In those years there were only 185, 213 and 170 voluntary liquidations of insolvent construction firms that ceased operating.

 

Construction insolvencies where an administrator or controller was appointed for the first time went from 1,284 in 2021-2022, to 2,213 in 2022-2023, then up to 2,977 in 2023-2024. This was a significant increase, and is the number that is typically used in media reports on construction insolvencies (e.g. Australian Financial Review, Macrobusiness). 

 

A better number includes businesses failing for a second time, or more, after a restructuring and agreement with creditors that allowed a business to continue. There were 355, 599 and 905 of these in the three years, so there was a big increase in construction businesses going into administration again in 2023-2024. Adding repeat insolvencies to first insolvencies and voluntary liquidations gives the total for all insolvencies.

 

Figure 1. Australian construction 2022-2024

 

Source: ASIC

 

 

Construction does have the highest number of insolvencies compared to other industries, but the construction share of total insolvencies has not been increasing, and was 25, 27 and 26 percent in those years. This is higher than the construction share of the total number of Australian businesses, which is 17 percent, but construction also has a higher proportion of micro and small businesses than other industries. 

 

Two of the reasons why construction businesses are more likely to become insolvent are this prevalence of micro and small firms and the knock-on effects on subcontractors when a contractor goes under, where many of the unsecured creditors will be subcontractors on their projects. Most subcontractors are micro or small businesses, and many are extremely vulnerable to a contractor’s insolvency. Businesses employing less than 5 people account for 65 percent of all construction businesses, and these businesses have little capital and few resources. Micro and small businesses have a much higher insolvency rate than larger businesses. 

 

Because of measures put in place to support industry during the Covid pandemic there were fewer insolvencies than usual in 2021-22, with a total of 1,639 construction businesses going into administration. The numbers for 2023 and 2024 are more typical, and these show a substantial increase in total insolvencies from 2,812 to 3,882.

 

However, in June 2024 there were 452,626 operating construction businesses, so the insolvency rate was less than one percent. Further, there are many more businesses in Construction than any other industry. The industry with the second highest number is Professional, Scientific and Technical Services with 344,311 businesses, the third is Rental, Hiring and Real Estate Services with 298,764 businesses, and the fourth is Transport, Postal and Warehousing with 237,326 businesses.

 

Construction Industry Entry and Exit

 

How does the number of ASIC insolvencies compare to the ABS Count of Businesses data?

The ABS numbers for annual business exits are much larger than the number of insolvencies, and were 69,972 in 2021-2022, 78,667 in 2022-2023, and 81,354 in 2023-2024. Again, there was a substantial increase between 2022 and 2023 as pandemic measures were unwound, but the increase between 2023 and 2024 was not as great. 

 

Clearly, insolvency is not the main driver of exits from the construction industry, as the cumulative total was only 8,333 insolvencies over the three years. Some unknown proportion of exits will be businesses that have paused operation, and stopped paying GST for a couple of years, probably because of market conditions. 

 

The ABS data is quarterly, and for exits in particular there is a marked seasonal pattern, with a cycle that peaks in the December quarter and has a low in the March or June quarters. As Figure 2 shows, there is a different cycle for entry, which peaks in the September quarter. What is driving these regular cycles of entry and exit is a matter for speculation. Entries can be births (new ABNs) or other (an ABN that has been reclassified or restarted GST payments). For Construction, in most quarters there are more births than others, for example in the June 2024 quarter there were 12,229 births and 10,753 other entries. 

 

There are, over time, more entries than exits, except for the December quarter. The average quarterly number for exits since 2020 was 17,886 and for entries was 21,574. The net result is that the number of construction businesses has been increasing steadily since 2020, rising from 397,920 in June 2020 to 452,626 in June 2024, a 14 percent increase in the number of businesses. If the number of businesses is representative of industry capacity and the supply side of construction, these numbers suggest industry capacity has been increasing.

 

Figure 2. Australian construction 

 

Source: ABS 8165

 

The ABS also has overall entry and exits by employment size, although this is not given for individual industries. In 2023-2024 Non-employing businesses had an exit rate of 17.7 percent, and businesses employing 1 to 4 people an exit rate of 9.5 percent. These rates are much higher than those for larger businesses, those employing 5 to 19 people was 5.5 percent, businesses employing 20 to 199 people 3.1 percent, and those employing over 200 has an exit rate of 3.2 percent. As noted above, exit rates are not the same as insolvencies, but this is good evidence of a higher rate of insolvencies in the micro and small businesses that are the great majority of construction firms. 

 

The ABS calculates industry entry and exit rates as percentages, and Construction does not have the highest rates. As table 1 shows, there are many industries with higher entry and exit rates, although no other industry has a larger number of businesses than Construction. In the 2023 December quarter the exit rate was higher than the 5.8 percent for Construction in five industries, and around the same rate in five others. In the 2023 September quarter the entry rate was higher in six industries, and around the same in seven others. In those quarters for all Australian businesses the exit rate was 5.3 percent and the entry rate was 5.5 percent, so the exit rate for Construction was slightly higher and the entry rate exactly the same. 

 

Table 1. Number of businesses, entry and exit rates in peak months, by industry

 

 

Construction industry sub-divisions

 

The ABS also provides this data for the three industry sub-divisions. The numbers for operating businesses are of particular interest. In June 2024 there were 10,542 Engineering construction businesses, 108,764 Building construction businesses, and 332,320 Construction services businesses. These sub-divisions had 2.3, 24 and 73.7 percent of the total number of construction businesses.

 

The same pattern of a December quarter high for exits and a September quarter high for entries also holds for the sub-divisions, with December 2022 having the largest number of exits for all three sub-divisions. The March 2023 quarter was the low for entries for Building construction and Construction services, and March 2024 the low for entries in Engineering construction. Figures 3, 4 and 5 have this data.

 

Figure 3. Australian Building construction 

 

Source: ABS 8165

 

 

Figure 4. Engineering construction

 

Source: ABS 8165

 

 

Figure 5. Construction services

 

Source: ABS 8165

 

For all three sub-divisions the total number of businesses has been increasing. Between June 2020 and June 2024 the number of Engineering construction businesses went from 10,052 to 10,542, Building construction businesses from 90,722 to 108,764, and Construction services businesses from 296,246 to 332,320. As percentage increases over four years these were 5, 20, and 13 percent respectively. The average quarterly number of exits and entry between 2020 and 2024 for Engineering were 363 and 395 businesses, for Building were 4,666 and 5,837 businesses, and for Construction services were 12,858 and 15,543 businesses. 

Conclusion

 

ASIC data shows a total of 3,882 construction businesses becoming insolvent in 2023-2024, and the industry had the highest number of failures with 26 percent of all insolvencies. However, this needs to be kept in context, because Construction by far the largest number of businesses compared to other industries, and in 2024 had 17 percent of all businesses, and with over 450,000 businesses has a failure rate of less than one percent. It is misleading to claim Construction has an exceptionally high number of insolvencies. 

 

The ABS numbers for annual business exits are much larger than the number of insolvencies, and were 69,972 in 2021-22, 78,667 in 2022-23, and 81,354 in 2023-24. There was a substantial increase between 2022 and 2023 as pandemic measures were unwound, but the increase between 2023 and 2024 was not as great. Clearly, the insolvency of a few thousand businesses is not the main driver of exits from the construction industry.

 

The ABS data for exits has a marked seasonal pattern, with a cycle that peaks in the December quarter and a low in the March or June quarters. There is a different cycle for entry, which peaks in the September quarter. What is driving these regular cycles of entry and exit in Construction is a matter for speculation. 

 

Many industries have higher entry and exit rates than Construction, although no other industry has a larger number of businesses. In the 2023 December quarter the exit rate in five industries was higher than in Construction and around the same rate in five others. In the 2023 September quarter the entry rate was higher in six industries, and around the same in seven others. 

 

There are more entries than exits, except for the December quarter. The average quarterly number for exits since 2020 was 17,886 and for entries was 21,574, so the number of construction businesses has been increasing steadily since 2020, rising from 397,920 in June 2020 to 452,626 in June 2024, a 14 percent increase in the number of businesses. If the number of businesses is representative of industry capacity and the supply side of Construction, these numbers suggest industry capacity has been increasing.

 

For all three sub-divisions the total number of businesses has been increasing. Between June 2020 and June 2024 the number of Engineering Construction businesses went from 10,052 to 10,542, Building Construction businesses from 90,722 to 108,764, and Construction Services businesses from 296,246 to 332,320. These sub-divisions had 2.3, 24 and 73.7 percent of the total number of construction businesses, and their percentage increases over four years were 5, 20, and 13 percent respectively. 

 

Construction businesses are more likely to exit or become insolvent because two thirds are micro or small businesses employing less than 5 people, which have a higher rate of insolvency than larger businesses. Subcontractors are also vulnerable to the knock-on effects on their capital and cash flow of a contractor’s insolvency, where many of the unsecured creditors will be subcontractors. Although exit rates are not the same as insolvencies, the ABS data is good evidence of a much higher rate of insolvencies in the micro and small businesses that are the great majority of construction firms. This is an important piece of context that should be taken into account when considering insolvencies. 

 

Incremental Innovation in Construction

 The example of concrete

 

Construction of the built environment has an interlocking set of economic, political, legal, and social barriers that make innovating difficult. As long as current technology meets the expectations of clients and users for prices and dominant products, there will be significant market imperfections such as network economies, lumpiness, split incentives, requirements for collective action, and transaction costs that inhibit diffusion of more efficient, advanced technologies. There is also an institutional structure that imposes regulatory hurdles or other policy disadvantages, favours existing technology or discourages new entrants, and a financing system based around incumbents. Educational curricula, career paths, and professional standards use existing technology. And because organizations, people and technical standards are embedded within a production system, the tendency is for technologies to develop along defined trajectories unless or until deflected by a powerful external force.

 

Construction of the built environment is a project-based system of production with complex professional, organizational, contractual and working relationships, and is geographically distributed. Moreover, the context is one of wider networks containing many small and medium size firms with a range of organizational and institutional relationships, where external contracting is common. All these factors are seen as inhibiting, although not preventing, innovation and diffusion of new technology. Within such a system incremental innovation improves industry products and processes without affecting the structure of the system. 

 

In construction, many technical advances have come from materials suppliers or component, plant and equipment manufacturers, who have been responsible for the introduction of new products and equipment, such as excavators, cranes, facades and lifts, using incremental innovation directed at improving existing products and processes. Across the construction supply chain firms don’t create new industrial networks to develop or exploit new technologies such as lifts and elevators, glass facades, and interior wall systems, instead these firms become part of the existing network, which is the modern construction production system. As a well-developed industrial system many of its sub-markets are expected to be concentrated and oligopolistic, with a few large, well-established firms exactly like those economic historian Joseph Schumpeter suggested would be most likely to engage in R&D, invention and innovation.

 

The process where inventions are developed, tested and extended, and finally put into production is one of incremental innovation. Firms refine specific parts of a production system, usually in response to something changing elsewhere in the system as production and distribution methods evolve over time, step by step. Although this form of innovation is incremental, it should not be dismissed as unimportant. Examples are the increase since 1950 of mining truck loads from 4 to 400 tonnes and the increase in lifting capacity of tower cranes to over 1,000 tonnes. Another example is the development of computer-aided design (CAD) software, which went on for two decades before Autodesk was started in 1982, one year after the first IBM PC. Over the decades Building information models (BIM) have advanced through 2D and 3D versions to the 4D (schedule) and 5D (cost) iterations today. Now software linked to cameras on helmets or drones can provide real time augmented reality (AR) images from a building site linked to the BIM model of the project.

 

Building and construction products and processes are the outcome of a long development path. Many of the industry’s global leaders are well-established, Bechtel for example is over 100 years old, and other firms like Hochtief, Skanska, and AECOM can trace their origin stories back over a similar period. Shimizu is over 200 years old. Most of today’s manufacturers also have their roots in nineteenth century firms. It’s a remarkable fact that construction today is a production system that has been developing for more than 150 years, since the arrival of steam, steel and concrete, using incremental innovation to gradually improve products and processes. 

 

In the industry life cycle, after emergence and the initial growth stage, technology stabilises around standardised products and processes. In many cases industries are oligopolistic, with a few specialized firms in market niches or layers in the supply chain. Consolidation leads to industry concentration with large firms dominating their markets, the car industry is an example. Construction materials like cement, concrete and glass, and components like building management systems, interior walls, plumbing fixtures, lifts and elevators are all oligopolistic industries in an established supply chain.[i]

 

 

Incremental Innovation: The example of concrete 

 

The development of concrete is an example of how effective incremental innovation in construction can be. By the 1880s the increasingly widespread use of concrete had changed its status from hobby to a modern industry, as scientific investigation into its material properties revealed its shear and compressive characteristics. With the development of reinforced concrete there was change in architectural concepts of structures and approaches to building with concrete. The industrial standards of concrete technology influenced ways of thinking based on building systems and standardized building elements. These became identified with what was known as the Hennebique System, a simple to use system of building with reinforced concrete columns and beams patented in 1892. By 1905 Hennebique’s system had spread across Europe and elsewhere and his company employed 380 people in 50 offices with 10,000 workers onsite.[ii]

 

Concrete then set the agenda for the development of construction as a technological system over the next hundred years driven by the modernist movement in architecture, as it explored the possibilities of these material for increasing the height and scale of buildings, and modern construction materials and methods.[iii] For over one hundred years, since Hennebique, there has been ongoing refinement and development of the world’s most widely used construction material, as shown in Table 1.

 

Concrete shows how incremental innovation in materials played a significant role in the reorganization of site production methods as mixers, pumps and chemicals were refined and developed in a long process of interconnected innovations. One of the characteristics of a successful technology are these spillover effects, with advances in one industry leading to complimentary developments in related industries. 

Table 1. Incremental innovation in concrete since 1800

Source: Jahren, P. 2011. Concrete: History and Accounts, Trondheim: Tapir Academic Press.

Innovation is continuing today with 3D concrete printing (3DCP). Research into 3DCP has focused on developing the equipment needed and the materials used, and by 2019[iv] over a dozen experimental prototypes had been built. By 2022 the commercialisation of 3DCP was underway, with two types of systems available. One using a robotic arm to move the print head over a small area, intended to produce structural elements and precast components, the other a gantry system for printing large components, walls and structures. 3DCP combines BIM models, new concrete mixtures and chemicals, and new printing machines. Again, a combination of new materials and new machinery is required for this technology to work.

 

In 2022 the Additive Manufacturing Marketplace had 34 concrete printing machines listed, ranging from desktop printers to large track mounted gantry systems that can print three or four story buildings. Companies making these machines are mainly from the US and Europe, and Table 2 also has details on the type and size of a selection of machines. There are also several companies offering 3DCP as a service at an hourly or daily rate.[v]

 

Concrete printing is only one part of the development of additive manufacturing. In mid-2022 the Additive Manufacturing Marketplace listed 2,372 different 3D printing machines from 1,254 brands. The number of printers and materials used were: 364 metal; 355 photopolymers; 74 ceramic; 61 organic; 34 concrete; 24 clay; 20 silicone; 19 wax; and 19 continuous fibres. Many of these printers could be used to produce fixtures and fittings for buildings. Producing components onsite from bags of mixture avoids the cost of handling and transport, and for large items avoids the load limits on roads and trucks. There are also printing services and additive manufacturing marketplaces being set up. These link designers to producers with the materials science, specialised equipment and print farms capable of large production runs and manufacture on demand. Examples are Dassault Systems 3DExperience, Craft Cloud, Xometry, Shapeways, 3D Metalforge, Stratasys and Materialise.

Table 2. Some companies making 3D concrete printers

Source: Additive Manufacturing Marketplace, 2022. 

 

 

Conclusion

 

Innovating in a complex, long established industrial sector like construction of the built environment can be difficult. The institutional architecture can impose regulatory hurdles or other policy disadvantages on new technologies, and government expenditures often support existing technology. Lenders are risk averse. There are subsidies and price structures that favour incumbents and ignore externalities like the environment and public health. Educational curricula, career paths and professional standards are oriented to existing technology. The dominance of existing technologies is further reinforced by imperfections in the market for technology such as network economies, lumpiness, split incentives and the need for collective action.[vi]

 

The construction industry has become used to incremental innovation and a gradual rate of change since the modern industry emerged over the last few decades of the nineteenth century. At the beginning of the twentieth century there was a great deal of resistance to change: ‘the older assembling industries like engineering were slow to change. Each firm took a proprietary pride in its own work’, and the trades were ‘fearful of technological unemployment and fought all changes in conditions of work.’[vii] Nevertheless, by the 1920s construction had reorganised the system of production around concrete, steel and glass. 

 

We are at a similar point today. The development of digital construction using combinations of BIM, offsite manufacturing, 3DCP, drones and robots, is an emerging new system of production, and the adoption and adaptation of these technologies will depend on incremental innovation continually improving their performance, which can only happen if they are put to use. There is a strong case here for public clients, who will be major beneficiaries of the improved efficiency of digital construction, to sponsor demonstration projects that use these technologies and measure the improvements in waste, carbon, defects, time and cost that are delivered. 

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[i] Syverson, C. 2019. Macroeconomics and Market Power: Context, Implications, and Open Questions, Journal of Economic Perspectives, 33, 3, 23–43. Syverson, C. 2008. Markets: Ready-Mixed Concrete, Journal of Economic Perspectives, 22, 1, 217–233.

[ii] Pfammatter, U. 2008. Building the Future: Building Technology and Cultural History from the Industrial Revolution until Today. Munich: Prestel Verlag.

[iii] Cody, J. 2003. Exporting American Architecture 1870-2000, London: Routledge. 

Huxtable, A. L. 2008. On Architecture: Collected Reflections on a Century of Change, New York: Walker Publishing Company.

[iv] Sanjayan, N. and Nematollahi, B. (eds.) 2019. 3D Concrete Printing Technology: Construction and building applications. Butterworth-Heinemann.

[v] https://www.aniwaa.com

[vi] Bloom, N., Van Reenen, J. and Williams, H. 2019. A toolkit of policies to promote innovation. Journal of Economic Perspectives, 33(3), 163-84.

[vii] Hughes, T. P. 1989: 495. American Genesis: A Century of Invention and Technological Enthusiasm 1870-1970, Chicago: University of Chicago Press. 

Australian Built Environment: Output and Employment

 

Industries are groups of firms with common characteristics in products, services, production processes and logistics, subdivided by the SIC into a four-level structure. The highest level is alphabetically coded divisions such as Agriculture, forestry and fishing (A), Manufacturing (C) and Information and communication (J). The classification is then organized into two-digit subdivisions, three-digit groups, and four-digit classes. SIC codes are therefore two, three and four-digit numbers representing industries, defined as firms with shared characteristics.

The SIC definition of the construction industry captures the onsite activities of contractors and subcontractors, and this data on building and construction work is taken to represent the industry. However, onsite work brings together suppliers of services, materials, machinery and equipment, products, components and other inputs required to deliver the buildings and structures that make up the built environment. When enough firms share sufficient characteristics they are often described as an industry cluster or sector.

The data used here is provided in the Australian Bureau of Statistics annual publication Australian Industry (ABS 8155), produced using a combination of data from the annual Economic Activity Survey and Business Activity Statement data provided by the Australian Taxation Office. The data includes all operating business entities and Government owned or controlled Public Non-Financial Corporations. Australian Industry excludes the finance industry and public sectors, but includes non-profits in industries like health and education and government businesses providing water, sewerage and drainage services. The industries included account for around two-thirds of GDP and the data is presented at varying levels for industry divisions, subdivisions and classes. The most recent issue is for 2020-21.

There is data at the two digit subdivision level for the Construction services and Property operators and real estate services industries. For the subdivisions in Professional, scientific and technical services and Building cleaning, pest control and other services the data includes contributions from other classes outside the built environment. Therefore, for these industries the two digit subdivision estimates have to be weighted using the four digit class data for the built environment component. These proportions are released as supplementary tables and provide data at the class level. Professional, scientific and technical services were included in 2015-16, and in 2016-17 this data was provided for two divisions: Rental, hiring and real estate services, with subdivisions Rental and hiring services (except real estate), and Property operators and real estate services; and Administrative and support services, with subdivisions Administrative services and Building cleaning, pest control and other support services.

The data is not complete because some industries cannot be separated into the relevant classes from Australian Industry. For example, rental of heavy machinery and scaffolding (class 6631) is in subdivision 66 but the data is not available to separate it from the other classes. Also, services such as marketing, legal, insurance and financial are important inputs, but again are not identifiable. Government spending on infrastructure and investment in departments like health and education is included through supply industries, although any maintenance and work done internally will generally not be included. That also applies in industries like retailing and transport where some unknown proportion of work is done in-house.

There is also leakage around the boundaries of industry statistics: some glass is used in mirrors, some in car windscreens; textiles are used in buildings; architects design furniture; engineers repair machines as well as structures, and so on. Because Australian Industry uses tax and business register data, it is the self-classification of firms to SIC industry classes that fundamentally determines the structure and scope of that data. Needless to say, such classifications are not perfect, particularly in regard to large multi-unit or multi-divisional organisations. The data here includes sixteen industries that together form one of the largest and most important industrial sectors in the economy.

Table 1. Australian Built Environment Industries

Supply industries Demand industries              Maintenance industries

Quarrying             Residential property Water, sewerage and drainage

Building construction     Non-residential property Waste collection, and disposal

Heavy and civil engineering     Real estate services          Building and industrial cleaning

Construction services                 Building pest control services

Architectural services                 Gardening services

Surveying and mapping services

Engineering design and consulting

Manufacturing industries

Figure 1.

Table 2. Economic Contribution of Australian Built Environment Industries 2020-21

                                                Employment IVA $billion

Total Australian Built Environment Industries 2,228,000 282

Total Australia Employment and GDP              12,369,000 2,069,178

Built Environment share of Australia total          16.9% 13.6%

Sources: ABS 8155, ABS 5206, ABS 6202.

Figure 2.

Figure 3.

Figure 4.

Figure 5.

The IVA of the sixteen built environment industries contributed 13.6 percent to Australian GDP in 2018-19, within a long-run range between 13 and 15 percent of GDP since 2006-07. The sixteen built environment industries share of total employment was 16.9 percent, and its long-run range was between 16.5 and 17.5 percent of total employment.

Figure 6.

Figure 7.