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Mitigating Financial Risk in Construction

by archi (follow)
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Business (102)      Management (27)      Strategy (17)      Finance (14)      Planning (13)      Taxation (2)     
The rise in GST rate in Australia to fifteen percent is expected to increase the costs of goods and services by a huge margin. From education costs to prices of essential commodities, Australians are set to be hit hard by price increases in the coming days. One of the industries likely to be most affected by the increase in GST in Australia is the construction sector. Costs of site acquisition, as well as those of building materials, are expected to go up. Dwelling investment will face a major slowdown as a result. This decline is likely to be seen not only in the construction of new homes, but also in the alteration or addition of components in houses. The increase in the rate of GST tax, therefore, is expected to present a previously unforeseen financial risk to construction in addition to the other common risks that face project financing.

Typically construction costs, especially of big projects, are usually met through a construction loan. Many banks that are involved in financing construction projects usually do not include the GST tax in the construction loan process because it is considered to be a self-liquidating. Thus, financial managers have to think of how to finance this tax to prevent funds from running out before construction is completed.

According to this article from Holden Capital, one of these options would be to discuss with the lender how they would like to deal with GST that is paid on acquisition of property. Some financiers would prefer that one cater for the tax from their money .Others, on the other hand, would be willing to offer an excess amount to fund this tax. However, they require that one requests for a refund, and this would be used to reduce the initial loan.

On mitigating tax costs incurred during the development phase of your project, same as on acquisition, it is important to discuss with the financiers the available options. Some may require a construction financial manager to cater for the tax from their pocket. Others, however, will provide the money after one has paid the tax if they claim a refund. Others have an overdraft facility that caters to GSM tax and will refund money used by a developer on tax at the end of every month. Also, the lender may have a project finance facility that incorporates GST. The claims for the first two months will have the tax included. After that, the claim will include an adjustment for the tax equivalent to the refund that would have been claimed by the developer in the two months preceding.

Apart from an increase in GST tax rate, other factors that might pose a financial risk to developers in Australia are environmental and social disturbances. These would bring construction to a halt. In doing so, it would be impossible for the developers to obtain the revenue they were expecting. Consequently, they would not be able to offset the loan balance. Hence, such factors must be controlled to prevent financial loss from occurring. Financial managers can mitigate this risk by first of all researching on potential social and environmental factors that could threaten the project. After doing so, they should make an appropriate plan on how to keep such factors at bay. For instance, if the project has the potential of facing opposition from the area residents, it would be impossible to continue constructing peacefully. So, it would be of utmost importance to find ways of solving their grievances before embarking on the project.

From rising GST rate to social and environmental factors, a myriad of challenges exists that could pose a risk to keywords: construction finance. Troubleshooting these factors and planning ahead is the only way that a financial manager can keep financial risks at bay.

Image Resource: Pixabay.com

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