The ripple effects of the Probuild collapse

Updated: Mar 21



Often business owners find themselves in financial difficulties through no fault of their own. They have run their business well, been careful with their money and cashflow and done all the right things. Some unforeseen event and, all of a sudden, there is trouble. For business owners lately, it has been one thing after another. Background The most recent in a series of unfortunate events is the collapse of Probuild. At the time of its collapse Probuild had annual revenue of $1.4bn and was working on 18 major commercial and public sector construction projects across four different states. Some of the figures are staggering:

  • At least 2,300 creditors have already advised they are owed money. More are expected to make claims in the coming weeks.

  • $311.6m in trade related liabilities.

  • 768 staff impacted, with outstanding employee entitlements estimated at $14m.

Immediate effects of the collapse The fallout from this business failure is widespread and complex. You know it is a big deal when the administrators, Deloitte, were granted an extra 21 days by the courts to prepare their initial report to creditors. Deloitte were the administrators that handled Virgin Airlines. Their lawyer called the situation with Probuild “nightmarish”. For those creditors that are owed money the effect is obvious. Creditors will include tradespeople working as subcontractors, many of whom were probably already struggling. Those suppliers and other creditors will be likewise impacted. For many businesses out there, this may be the straw that breaks the proverbial camel’s back. There are already stories coming out about the devastating impact this is having on businesses that are owed money by Probuild. Then there are those entities that Probuild was working for. With so many projects under construction this is a massive issue. For public sector clients this may mean increased costs to have the project finished. For commercial clients this could jeopardise the viability of the development they are doing. Deloitte have advised they will be seeking a buyer for the business as a going concern, with parts of the business reportedly having already been sold by the administrators. What happens if this process becomes protracted though? Should any of the commercial clients collapse as a result there is likely to be another shockwave. So what though? As long as your clients don’t do business with Probuild it is no big deal, right? Hopefully– but it might be. The looming ripple effects of the collapse Major corporate collapses like Probuild usually have significant downstream impacts. For example, a business that services and maintains equipment may not have a direct exposure to Probuild. Their largest client does though, and now they are not going to get paid. Can they pay their bill to the equipment service business? What happens if they don’t? Sometimes it doesn’t have to be the downstream business’s biggest client. In the current environment, how many small businesses out there could afford not to be paid by the biggest, second biggest, or even third biggest debtor? Some issues and pressures you may not expect are already being felt. A looming issue is around insurance. On the one hand, the insurance market for construction professional indemnity insurance is shrinking. This market has become concentrated in the hands of fewer, larger insurers, leading to reduced competition, increasing premiums and more restricted coverage. Insurance companies have been pulling back from the construction sector for some time, and this trend may continue. Another issue to consider is debtor insurance. Many businesses rely on debtor insurance to provide a measure of surety to their cashflow. For others, it may be a condition of approval for a debtor finance facility, trade finance facility or other lending obligation. Again, these insurers are going to take a financial hit from the collapse of Probuild. This may further reduce insurance options for businesses or increase the cost. Either way, this may impact businesses out there that are otherwise unrelated to Probuild and its issues. How vulnerable is your business? Some people say there is a “domino effect” where the failure of one business causes the failure of another, and so on, as the dominoes fall. This is not quite right, as the reality is that things are not this simple or linear. Rather, a major corporate failure like Probuild is more of a contagion. The way the problem spreads is not in a straight line. Financial pressure can hit in unexpected places. Some businesses will get sick and recover, others won’t. Some dominoes might fall, where others will only wobble, only to have another domino fall over further down the line. It can be hard to measure a business’s vulnerability to a major corporate failure, as the effects can be so unpredictable. However, a concentration of debtors with a particular client, or highly similar clients within a certain industry, can be a sign of risk. Sometimes these risks are part of doing business, but business owners should look to manage the risks they can now. There had been talk of impending failures in the construction industry. With billions of dollars of major projects on its books though, there was no clear indication that Probuild was about to fail. In the end, Probuild appears to have succumbed to the pressures that are facing many construction businesses right now. Fixed price contracts, rising material costs, supply chain issues, labour issues, etc. The business environment is so uncertain at the moment, with shock after shock hitting small businesses. In these uncertain times it is even more important that business owners have a Plan B for their business and the right personal asset protection strategies in place.

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