Construction Outlook

The last few weeks has seen a few major construction companies get into financial difficulty and many, ultimately, go into some form of process - Be it a CVA, administration or a liquidation.

When things are reported as stark and as grimly as this, it makes everyone's ears prick up and ultimately, it leads to further issues in the market - Consumer confidence is reduced, investor confidence is reduced and ultimately, the trickledown effect within construction slows down.

Between the changes in Crown Preference in 2020, the changes in VAT rules for construction, the move from Red to White diesel, material and labour shortages, rising labour costs and any number of reasons why sites are not completed on time and the lingering effects from COVID - Life for construction companies has been hard enough the last few years.

The media makes things out to be a lot worse than they are, you could be in a really good place so don't let the external noise distract you from your focus. It’s just about ensuring you get your ducks in a row and doing some low / no cost re-evaluations of your overhead and borrowing structure that can potentially make a massive difference.

The other thing to remember is we've just come through an odd December with many companies closing down in mid-December and not re-opening until the 9th January - This is the typically slower period of the year.

Here's a few things to think about:

Cashflow:

Build a 13 week, rolling cashflow - Understand what you have now, understand what has to go out and understand where funds are tied up - This is particularly important in times of uncertainty, the cash flow document should be used to connect management with the cash impact of operations to allow cash collection and spending targets to be set.

Do a reconciliation of your available cash and any money owed in, however think about legacy monies that are owed in too do you work on retentions? Have you explored all available options to your business such as R&D tax credits? What terms do you get from your suppliers?

Have a word with your bank and funders, is there anything you can do to smooth out your cashflow - Funders can look at forbearance and rescheduling of finance agreements, alternatively, you can look at re-financing equipment to release additional capital.

Can you get a back-up facility, post Crown Preference, unsecured overdrafts are less available, however, any other debt you get will normally require a PG or a secure charge so have that discussion with your bank to see if it's something they can facilitate - It may not be but the banks DO want to support so it is important to have that conversation.

Look at back-up facilities - Some people are against using facilities such as Invoice Finance for construction companies HOWEVER, you may not need to go into a full facility with a funder and may be able to agree a selective facility that just gives you a bit of a back-up - The cost is higher but if you only use it rarely, it may better than the 13th hour option when you have run out of cash unexpectedly. The market has a number of innovative products and there may be options such as security backed products that can offer further assistance.

Systems and processes:

Companies House, your insurance company, Social Media, Credit Safe, your Trade Creditors and Trade Debtors reports and people down the pub – They are all great sources of information, not always reliable but information is important and especially when it’s within your circle.

Follow your clients and suppliers on Companies House, Credit Safe and on Social Media – If you see an early warning sign, then it gives you time to act.

Insurance Companies are a PHENOMINAL source of data, if you insure your debts then keep talking to them and if you don’t insure your debts, go have a conversation with someone who can.

To bolster your position, have a conversation with a specific credit insurance specialist - Yes, you will lose some profit out of a project but losing a little bit is better than losing everything. Some people just get the insurances they NEED to have to operate but the wider suite of products are out there for a reason...

Watch your Trade Creditors and Trade Debtors reports – Look for concentrations, payment terms slipping out and think of ways you can insure your clients stay within their terms.

If you produce good monthly management accounts, you will be able to accurately calculate your creditor days, your debtor days and your trade / business cycle – Don’t let others use your business to fund theirs!!!

Fleet Strategy:

Do you run a fleet of machines? This is the point to do some fleet considerations and look at a potential new strategy - You may think this will only apply to the really big companies but having a Corporate strategy in an SME construction business can have a huge impact.

Look at a fixed and variable fleet.

The assets you have under contracts and always NEED, those are the one's you BUY - Understand what is always utilised within your contracts and those are the items you buy.

If you have new contracts or are dealing with a new client, a client inside a SPV, a client where they've got you on site quickly and the paperwork trails aren't completely signed off - Those are the assets you HIRE.

The typical trend is for people to just try and buy EVERYTHING but always try and buy assets to a sensible level, consider your average fleet utilisation and try and buy the more run of the mill assets and have less of the bespoke stuff in your fleet. The biggest bit is, fleet utilisation is always a tricky thing to work around for an SME, however, construction companies are constantly talking - There's nothing to say you can't buy an asset in tandem with another business with them doing reciprocal hiring or buying a reciprocal purchase.

After you've done a fuller overview of your fleet, it may be time to get rid of the stuff that you don't need - It may not a great time to be selling machines but holding the asset, paying insurance and maintenance and depreciation / general wear and tear isn't going to make it any better for you in 6 months time when you realise you still don't need it.

Coming out of a difficult economic period, equipment hire is what drives construction so make sure you can be flexible with your fleet - Ensure your fleet can be hired out and you have told your funders and insurance companies you're changing your tactics somewhat - You don't want to be in breach of contract!

Also, a good thing to think of is why do Corporate construction businesses use SPV's? In case there is an issue and to reduce liabilities to the wider group - As an SME you PROBABLY don't want to do that due to making your life a lot more complex but setting up a structure with your assets hived off into a "Plant Holding" business - This give you downside protection if your main construction business goes down.

The other option is that you can release capital from your fleet, it is a very good way to get your assets to support your business but there are some really important considerations to make when doing this - Again, talk to someone with proper experience in the market before doing this.

It’s important to note that this form of restructuring can only be achieved effectively when the business is solvent.

Contracts:

This is a good time to re-evaluate your contracts internally and externally.

Externally, most SME businesses will sign into the main contractors contract however, don't go into it blind - Ensure you have a qualified QS or construction lawyer check into them too; 99% of people will do this or say they do this but it's always important to state it.

The next thing is to try and push back on a few terms and get it in writing what things mean, there was recently a leaked e-mail from a major housebuilder that said for internal QS's to manage cashflow and to only pay what needed to be paid - If the QS signs off your work, it needs to be paid and you need to ensure they're not funding their business on your back. If they say they pay 7 days after invoice, it gets to day 10 - Why hasn't it been paid? What contractual levers can you use to get them to pay quicker? Can you play hardball such as downing tools or slower working patterns?

DON'T call them out of social media.

DON'T do something that'll impact your business

They will use "fair" and legal process on you so you are within your rights to do the same to them.

It may also be worth getting someone to check any contractual terms you are bound by such personal guarantees, retentions, bonds and liability agreements.

Remember, whilst on site, the paper trail to approve any variations or additional works is vital - This is one of the main causes of delayed payments in the industry so get everything in writing as much as possible.

Talking and listening.

You pay for an accountant, you know other construction companies, your bank, your lawyer and you know people who have built successful business and people who've have businesses collapse - NO-ONE WANTS TO SEE YOU FAIL.

Pick up the phone, go have a coffee with someone or tap into the un-ending amount of resources to the construction market for support and advice.

The big one for us is, get advice in EARLY - We VERY regularly get people to speak to Debt Advisory Businesses / Insolvency Practitioners but by being proactive and getting them in through the door early, they can normally give people sensible advice and support on making sure the patches are filled and have to weather the storm best.

The night is darkest before the dawn...

The, hopefully, shinier side of the coin in that that most developing nations use construction to get the economy back moving. Young people are seeing that there is good money in construction again so the labour shortage isn't as bad. Second hand prices for machines are going down and those who have a strong pipeline now may benefit from a glut of excess machines hitting the market. There is an abundance of advice and support available in the market, There are supportable market metrics, most aren't going to cost you much and most are cheaper than the alternative of damaging your business.