Bad debt insurer for construction firms enters Christchurch market
Just two weeks before the collapse of Christchurch-based Challenge Steel the sales manager of National Credit Insurance Allan Mabey warned of the risky construction sector environment.
Credit insurance allows companies to make claims in the case of financial collapses leaving them out of pocket.
“We’re dealing with a large number of Christchurch insolvencies, mainly construction related, and we anticipate things will get worse. That’s why we’ve opened an office in the city.
“I’d been talking to broker about potential prospects and he mentioned a business that had exposure to Challenge Steel but unfortunately we never got to write a policy for them,” Mabey said.
Mabey’s company keeps a tally on policy claims and it shows Christchurch in the lead at 44 per cent of all claims in the first half of 2017, Auckland 28 per cent, and Wellington 11 per cent.
There were 327 claims in the construction sector over the period, worth about $15.9m.
“Whenever there’s fast growth in any industry you see significant business failures due to cash flow problems.
Mabey said his company was well placed to measure the effects of business collapse because it wrote about 65 per cent of this type of insurance nationally.
He cited the example of a Christchurch client in the construction sector turning over about $10 million a year and the bank recommended he look at credit insurance.
“After several discussions with National Credit Insurance the company decided the annual premium of about $16,000 was too expensive and it knew its clients well enough not to have any problems.
“Three months later their largest client went into liquidation owing $280,000. They are now a client,” Mabey said.
Figures collated by National Credit Insurance show a big spike in credit claims nationally in 2016, easing back a little this year.
Some of the bigger collapses in recent months included QB Construction, Banks Group, Grace Developments (2008), Point to Point Holdings, and Challenge Steel.
But there have also been numerous liquidations of smaller companies in the High Court in Christchurch which never see the light of media publicity.
Ironically, another potential risk to construction and sub contracting firms is a new law designed to protect them
James MacQueen of accounting firm BDO said many businesses don’t know about the implications of the Construction Contracts Act requiring them them to keep retention payments safely aside.
Retention payments are when a main contractor holds a portion of a sub contractors pay, generally about 7 percent of the total payment, to ensure any commissioning or unsatisfactory work is completed.
The new law requires everyone in the construction chain to do the same.
For example, if a window fastener employs a sub contractor to do rubber sealing, the window fastening company must keep aside a retention payment.
MacQueen said companies could put aside the money in a trust fund, or they could take out insurance.
However insurance companies would require companies to show they were financially strong.
MacQueen said companies unable to put aside cash or obtain insurance would struggle to attract sub contractors to work for them.
He predicted a shakeout in the industry partly because of the new rules and partly because the building boom would taper off leaving under capitalised companies which had made bids for work that were too low.