Construction in crisis – what’s the solution?
According to a report by the accountants Mazars, 16,755 UK construction companies are at significant risk of closure this quarter – a jump of 54% on the previous quarter, when the figure was 10,686.
And data provided to trade magazine Construction News by Creditsafe in September found that 158 construction companies had entered administration so far in 2022, compared with 85 at the same point in 2021.
There are two main issues we’re seeing with clients in the construction industry: inflation and cash flow. We’ll look at how you can protect yourself against these threats and how, by adjusting your business’ policies and processes, you could give your business a layer of security.
“The construction sector has been one of the hardest hit by inflation. Prices rises for construction materials have had a huge impact on the ability of a construction company to control costs on a project,” said Rebecca Dacre, Partner at Mazars.
The surging cost of materials is the main cause for the nervousness among construction firms, not helped by other inflationary pressures and rising interest rates. According to the UK’s most recent ‘Government’s Building Materials and Component Index’, material prices increased 24.1% in the past year.
Andrew Boccoli, a director in the commercial property department at Edinburgh law firm Lindsays, said construction firms must take steps to protect themselves legally against inflation-driven cost hikes.
In fact, according to Boccoli, many construction companies are already including ‘fluctuation provisions’ clauses in standard contracts. “This is a mechanism for dealing with the effects of inflation and changes in costs…[it] will give contractors comfort that they will be reimbursed for spiralling costs”.
Rebecca Dacre said: “Poor cash flow is an endemic problem in the construction industry so it doesn’t take much to undermine the solvency of many construction companies.” You might increasingly find that late payments are becoming an issue, as everyone faces a cash-flow crisis of their own. Late payment by your clients can have a knock on effect on your own suppliers, increasing your reliance on their goodwill – which cannot last forever.
Make sure you go back and look at your payment terms. Are you able to reduce the time you give to pay on new contracts? Or secure more of a percentage upfront? If you’re struggling to collect payment from existing clients, being honest and fair is the best policy. You should speak to your clients about prompt payment, not just to improve your cash flow but to ensure projects are successfully completed.
Revisiting your business’ processes.
When the owners or directors of a company come to us for help, it’s not always because they’re insolvent. Some need help to reassess their business and see what’s working and what’s not.
Our first port of call is to work through a process we call The Kitchen Table Process. We call it this because we unpack their business metaphorically onto the table to work out the good, bad and sometimes ugly parts of it. By doing this together, our clients are able to see what they can change to make them more efficient and get them back into a steady profit.
Sometimes this means small changes, which can be easily undertaken. In others it can mean a more extensive overhaul. Whatever the circumstances, we guide them through the whole process from beginning to end.