Construction on ASIO Headquarters, the budget blow out of nearly $173 million and the losses experienced by small business has fuelled debate surrounding the failure of small businesses. Why has this ASIO HQ led to business failure and who is responsible are the obvious questions.
In 1992 I wrote a story for the Canberra Times about the ‘big project’. The big project is a not so common reason for business failure. The logic is this. The big project brings in more revenue and, you would expect, some profits. These features together with promoting reputation and brand make the big project very appealing. But the big project also brings with more investment and, as a result, more risk. More human and financial capital is needed. You need more materials and more people. You definitely need more attention to detail in managing the big project. You also need to bring in a broader skill set, such as risk management. You just need more time and money.
If the big project falls behind or the client is slow or worse still holds back payment, you will need even more money to carry you through until you get paid, so a bigger overdraft for example or more borrowings. This means you are now paying more interest.
With this greater investment, pure economic theory would suggest that you require a greater return. Those involved in the construction industry would know that this doesn’t happen. In fact margins on projects are lean. With a lean margin you need to be efficient. The machinery of government on a project which to date has experienced a $173 million budget blow out is far from efficient.
So what happens? More often than not, the financial pressure of not receiving payment on time is passed onto other stakeholders such as trade suppliers, contractors, taxes don’t get paid and you miss paying superannuation entitlements for staff, the so-called domino effect.
Sourced from statistics maintained by the Australian Securities and Investments Commission show over an 8-year period from July 2004 to June 2012, every year, on average companies operating in the construction industry will make up approximately 22% of corporate failures, business and personal services making up 23% with retail approximately 10%. The industry sector league table consistently looks like this:
- Business and Personal Services
- Property and Business Services
Construction and allied service industries feature in the top 5, every year
The same statistical set records the causes of failure. The league table here is:
- Poor strategic management of the business
- Inadequate cash flow or high cash use
- Trading losses
- Poor financial control, including lack of records
A poorly managed big project leads you to the more common reasons for business failure such as inadequate cash-flow, poor strategic management and financial control.
This is not to say that the businesses owners involved in ASIO HQ project are poor managers or do not manage cash-flow, but rather circumstances have developed which has led to management difficulties. There is a lot of discussion regarding ASIO HQ in social media. The term Latent Condition, where the actual conditions on site differ from what could be reasonably expected, is debated. If this type of condition is passed onto you through a contract you really are dealing with the unknown and management becomes harder still, if not near impossible.
The statistics for the ACT region show that in the 12 months from July 2011 to June 2012, nearly 150 companies entered into some form of external administration. This year the trend appears to be at or about the same. The domino effect does charge and there is likely to be more fall out from ASIO HQ.
Another perspective to consider is the big verses small. Firstly of all the businesses caught on this site were at different stages of their business life cycle. Regardless of whether you are a start up business or a mature one, whether you are big or small, on the big project the risk of failure is there and is real.