“When the tide goes out, we find out who’s naked” goes the saying – nowhere is this more true than in the engineering and construction industries.
One of the hallmarks of an economy that has passed its peak is the systemic failure of contracting companies.
During a boom, or a steady growth phase of an economy, contracting companies see cashflows increase as more projects come online.
That growth affects contractors in a number of ways – they start getting used to fatter margins and management starts to believe in their own invulnerability.
Blue sky seems to stretch on forever and massive growth rates seem guaranteed far into the future.
As the market matures the sky starts to turn grey as more contractors start fighting for lucrative jobs seeing cost estimates being fudged and dodgy deals done to win jobs.
Those dodgy contracts eventually come in at a loss and management starts desperately winning more projects to cover the losses on earlier work.
And so a spiral begins.
To make matters worse, the more aggressive contractors start buying out smaller competitors.
Often those competitors have similar bad projects on their books and their impressive growth rates are based upon winning jobs they should never have tendered for.
Eventually the spiral ends when the market stalls and there aren’t enough new projects available for the loss making contractors to cover the accumulated losses. Then the failures begin.
Collapses of the Hasties Group, Reed, St Hilliers and other construction and engineering contractors are classic examples of this cycle.
While shareholders and management carry some of the burden, the real pain of failure is felt by the armies of sub-contractors – largely small, family owned businesses – these companies employ.
Most of these subcontractors will not get paid for their outstanding invoices, forcing all of them to cut back their own employment and spending. For some, they will be forced into liquidation as they can’t pay their own bills.
For the families that own those small businesses the financial and emotional pain is real and immediate. Spending stops, debts go unpaid and relationships fail.
In some cases that small bankrupt plumber, bricklayer or concreter finds the stresses of failure too great and a family loses their breadwinner.
This multiplier effect of business failures and redundancies is one of the reasons the real economy is in a much tighter position than Australia’s political, business and media elites can bear to admit.
Another saying is “a recession is when your neighbour loses their job, a depression is when you lose yours.” For most families, the economy has been in recession for three years as they’ve seen friends and relatives accept reduced hours or have contracts terminated.
Much of the commentary about Australians being irrationally pessimistic misses this aspect of our economy. It’s amusing when the smug comments come from financial and economic journalists who don’t seem to have noticed the difficulties their own industry going through.
There’s a lot of naked people treading water at the moment and the tide is heading out. The question for all of is where the deep water is and where the hell did we leave our speedos.