Poor financial literacy has sparked sky-high construction insolvencies, RSM says

RSM partner Richard Stone, who has led complex insolvency and restructuring engagements across a variety of industries, said that a “perfect storm” was afflicting the construction sector - and many directors were not equipped to deal with it.

“As it stands, there are no mandatory qualifications for directors in the construction sector. A person can run a multi-million-dollar building business without the ability to interpret a balance sheet or understand basic financial risk,” Stone said.

“This gap in financial literacy contributes to poor cashflow management, under-provisioning for employee entitlements, and ultimately, insolvency.”

Construction companies have led insolvency rates for the past three financial years, ASIC data showed. In the 2025 financial year, 3,595 construction businesses underwent formal insolvency processes, a figure that has been climbing year-on-year.

Stone said that fixed-priced contracts signed prior to COVID price increases had been a “critical issue” for construction companies.

"It seems ridiculous that 5 years on we are still talking about COVID but the reality is, projects that once had a margin have zero profit now. Builders go back to principals, try to renegotiate better rates, but if just one says no, it can force the builder into administration," Stone said.

He suggested that stronger safeguards were urgently needed to ensure that construction directors were well-equipped to navigate the complex and evolving financial landscape.

“What’s needed is a mandatory baseline of financial education for directors—particularly in high-risk industries like construction,” Stone said.

“Directors should be equipped to read financial statements, understand their obligations under the Corporations Act, and make informed decisions about solvency and employee entitlements.”

Stone warned that, without reform, homeowners would continue to be left high and dry. He had seen first-hand cases of projects being frozen mid-way as construction companies grappled with cash flow issues.

“Each collapse left hundreds, sometimes thousands, of homeowners stranded midbuild, with deposits paid and construction halted. In many cases, there was no clear pathway for finishing their homes without significant additional cost,” Stone recalled.

He urged construction businesses to build contingencies into costings, avoid fixed-priced contracts where possible, and seek help - such as safe harbour provisions - early when facing the prospect of insolvency.

"We’re dealing with a market under pressure from all sides. Interest rates, planning delays, cost escalation, and skills shortages are converging,” Stone said.

“We need smarter systems to protect both homeowners, builders and suppliers.”