Navigating Increased Construction Costs in a Distressed Scenario: The Role of Private Funds and Strategic Decision-Making
The recent voluntary administration of Roberts Co's Victorian arm exemplifies the profound challenges currently facing the Australian construction industry. The Australian construction industry is grappling with increased costs, with material price hikes, labour shortages, project delays and sub-contractor insolvencies placing extreme pressure on developers and builders.
For sponsors and private lenders, this creates a complex challenge: should additional capital be deployed to complete the project, or is a strategic exit the best course of action? In distressed scenarios, working with an expert who understands both the construction and insolvency landscape is critical to making informed decisions that protect investment value.
The Impact of Increased Costs on Construction Viability
Rising costs have already tipped many builders into financial distress, causing cash flow constraints, delays, and an inability to meet contractual obligations. This, in turn, affects the entire development, often leaving sponsors and lenders in a precarious position. The key considerations for private lenders in this environment are:
- Is the project still financially viable given current cost structures?
- Can the builder deliver within the available budget, or is insolvency likely?
- Would a strategic exit provide a better outcome than completion?
Two Key Options: Completing the Project vs. Cutting Losses
1. Completing the Project Under Specialist Guidance
If the development retains underlying value, restructuring and continuing construction under the oversight of an expert with both insolvency and construction experience may be the best course. This ensures:
- Control over project delivery - A construction-experienced insolvency practitioner can step in to oversee costs, renegotiate supplier and subcontractor agreements, and ensure a disciplined approach to completion.
- Preservation of value - Instead of allowing an unmanaged collapse to diminish asset worth, intervention can help stabilise the project and generate a better return.
2. Selling ‘As Is’ to Cut Losses
In some cases, the best decision is to sell the project in its current state rather than risk further capital erosion. This approach:
- Limits downside risk - Avoids further financial exposure where cost blowouts or builder insolvency could lead to greater losses.
- Provides a clean break for stakeholders – Allowing investors to recover capital rather than becoming entangled in a protracted and uncertain completion process.
The Importance of Specialist Oversight
Navigating distressed construction scenarios requires expertise in both financial restructuring and project delivery. Private lenders should seek guidance from professionals who can:
- Assess project feasibility in light of increased costs and builder risk.
- Mitigate legal and financial risks, ensuring compliance with insolvency laws.
- Maximise stakeholder recovery, whether through restructuring, refinancing, or sale.
For private lenders and sponsors, the decision to fund completion or exit a distressed development must be made strategically. With construction costs already having risen and builder viability in question, working with the right experts ensures that any path forward—whether completion or sale—is executed in a way that maximises value and minimises risk.
