Why iCIRT’s gold star rating might save your business

The construction industry has been assailed from all angles in recent years, with supply chain constraints, labour shortages and increasing costs combining in a perfect storm that has pushed many beyond the brink.

One-in-four companies that have entered administration since 1 July 2022 have been construction companies, almost twice the rate of the next most affected industry, accommodation and food services.

The one shining light for companies who have weathered those challenges has been the healthy pipeline of work that has stemmed from low interest rates and Government-fuelled incentives.

But the good times are drying up.

Rising interest rates have slowed building approvals, says Campbell Gould, Partner at Pitcher Partners Sydney, especially in the residential market, which brings a drop in revenue and fewer jobs to go around.

“Approvals have been declining for some time and this slump is probably going to last for about 18 months,” he said.

“It won’t be immediately noticeable, as there’s still a lot of work happening as builders finish off the projects that were approved during the peak, but the pipeline is getting thin.” iCIRT provides a business with a star rating outcome, with five gold stars being the highest rating available, and a business with three gold stars and above is classified as trustworthy.

New data from the Australian Bureau of Statistics back up Mr Gould’s observations on the ground – in March, the number of dwelling approvals were trending down significantly in the ACT (-13.3%), Victoria (-6.5%) and New South Wales (-5.1%).

“At the same time as costs are rising and the flow of work is evaporating, the value of construction work completed has also started to drop,” Mr Gould said.

Cost of living pressures are undoubtedly a factor in potential customers putting their projects aside but there is also hesitation from customers, unwilling to risk long delays and seemingly sound building companies going under.

In response, Equifax, an independent regulated ratings agency, developed iCIRT in conjunction with new building reforms to improve trust and transparency, and ultimately bring back confidence to the construction industry.

To obtain a gold rating outcome, constructors participate in an independent and rigorous review of their business, including a detailed examination of their projects, processes, key people, governance structures, key trading partners and other related bodies, financial capacity and resilience.

Equifax Market Development Leader Alexandra Shaw said in creating iCIRT, extensive market consultation was undertaken across a broad range of stakeholders, including market and industry associations, strata, academia, Government, financiers and insurers, to ultimately agree on the characteristics that define a trustworthy business.

“Assessors use thousands of data points to evaluate 150 key data attributes across the business, the people behind the business, their past projects and their key suppliers and partners,” she said.

“The methodology centres around six key criteria: Character, Capability, Conduct, Capacity, Capital and Counterparties. We are seeking to understand those businesses that have the capacity, capability, resilience and reliability to deliver good quality-built assets. “Those able to attain three gold stars or higher are eligible to be recognised on the register of trustworthy constructors. This register highlights those across the industry that have been prepared to be open, transparent and participate through an independent and detailed review.”

Ms Shaw said around 190 companies had been through the evaluation system in its first year, with just under 300 in total signing letters of engagement.

“Consumers are choosing to place their deposits more with iCIRT rated businesses that have been independently considered trustworthy,” she said.

Construction companies don’t collapse overnight and warning signs appearing well in advance. A public and private sector working group was shown the iCIRT rating distribution following an assessment of thousands of constructors rated during Oct-Nov 2020 using publicly available information only.

Among those businesses that have subsequently collapsed:

• 9 out of 10 businesses that went insolvent had only 1 or 2 stars more than 12 months before entering insolvency; and

• 8 out of 10 businesses with serious defects or regulator action had only 1 or 2 stars.

“As businesses are required to complete the assessment annually, this provides assurance to the market when deciding whether or not to transact with a particular business,” Ms Shaw said.

“These outcomes could not be influenced by media noise, hearsay or the subjectivity of social site rankings, but rather using objective, evidence-based analysis according to attributes agreed as being important in determining transparency and trustworthiness.

“Feedback from global jurisdictions highlighted the importance of ensuring a star rating regime should be data driven and provided by regulated ratings agencies, which have the independence, integrity, veracity, quality and oversight to provide credible and enduring rating outcomes.”

Financiers are also seeking greater assurance from clients about the costs of a project.

“A lender to a building project may want some certainty around the project costs, so the customer will seek a fixed price contract from the builder,” Mr Gould said.

“Builders will look at the cost of materials and subcontractors as they prepare a quote, and traditionally allow for a 15% increase. The problem is that with rapid inflation, those material costs such as timber and steel are rising at 30% or 40% in some instances.

“With fixed price contracts, it is difficult to pass those increases in materials on. That’s why all these builders are going insolvent, because they just can’t continue to complete these projects that put them into a loss position.”

The upside for builders that do secure an iCIRT star rating is that it demonstrates strong foundations to financiers as well as customers, and it may also deliver a benefit from an insurance point of view, reducing pressure on costs.

Ms Shaw said it was important to recognise that any disclosures about a star rating outcome is on the builder’s terms only.

“It is a confidential assessment process. The only way anybody will know the ratings outcome is if the end business consents for that to happen, otherwise we do not share the information with anyone,” she said.

“Businesses actually have to sign a specific letter of engagement to consent for their rating (where eligible) to be shared on the public register on buildrating.com.

“In preparing for the assessment with the aim of obtaining a minimum trustworthy status of three stars, businesses are sharing that the time commitment is approximately 10 hours. “But where businesses are striving for five stars and best practice, it will take significantly longer.”

Mr Gould said Pitcher Partners recognised builders have been hit with a perfect storm of factors they can’t control, and he encourages clients to focus on factors they can influence, such as strategies to retain key talent and adoption of technology to better track resources.

“Builders, like so many business owners, get so busy with the immediate day-to-day demands they fail to take time out to consider strategies that will give them a longer-term competitive advantage,” he said.

“We recommend builders take time out with their accountant to understand their cost benchmarks and breakeven point, set an annual budget and meet at least quarterly to review business performance and cashflow.

“Understanding the true current financial position of a business allows owners to proactively respond to a rapidly changing market and enable the business to thrive instead of joining the ever-growing ranks of insolvent construction businesses.

“For those companies that have received a trustworthy iCIRT rating, they will reap the economic benefits that come from investing in good process and maintaining financial hygiene, and in turn will be more likely to attract and retain the great people vital to the success of their business.”

For more information, go to: https://www.buildrating.com