Hamish Fletcher: Slow cashflow sees builders going bust during boom

When the demand for housing could hardly be hotter, how is it that construction companies continue to fail?

Valiant Homes, an Auckland building contractor, appears to be the latest to have toppled over.

The firm, according to the first liquidation report, blamed a lack of funding from related-parties to enable it to pay suppliers and sub-contractors.

Its biggest creditor - at least at first blush - is Auckland financier Savings & Loans, which is owed $3.3 million. Suppliers and subbies are owed at least a further $1.5 million. One who contacted the Herald is presently out-of-pocket by about $4000.

While it might not sound like a lot of money, when you're a one-man-band that's a sizeable chunk of your monthly take.

In another case of a construction company navigating troubled waters, creditors of Matamata building business Stanley Construction (Waikato) have been asked to reach an agreement over debts so receivership or liquidation is avoided.

Jared Booth of McDonald Vague wrote to creditors seeking their agreement over money Stanley owed. About 42 creditors of the firm are owed $1.9 million.

Kevin Stanley, Stanley Group managing director, said that was the scale of issues at the business, now seeking a compromise with those creditors to be decided at a 1pm meeting at the Novotel Hamilton on March 23.

Construction firms seem to still be going into liquidation on a regular basis, including in Christchurch where the earthquake rebuild means an unprecedented demand for builders and other tradespeople.

This could be because there are more construction firms - and while it appears more are failing, it is simply the same proportion as before the building boom.

And just because there is work available, competition can still be intense, margins squeezed and pain caused by delays or cost overruns.

Although it may seem counter-intuitive, an industry expert says more construction firms go under during busy times.

"Unfortunately people don't understand the cashflow demands of a growing business. It's when you're actually most at risk," Specialist Trade Contractors Federation president Graham Burke told the Herald recently.

That's because if a firm is growing and a debtor doesn't pay, it has higher wage or supply costs to deal with but no cash to pay. "When you're growing you need cashflow in advance, it's when people come into grief. It's kind of the reverse of what people think - when it slows down your cashflow catches up for a while," he said.