A look at the UK construction industry at the end of 2016

bricklaying in construction industryIn December 2015 KPMG was forecasting a “positive outlook” for the construction Industry for 2016, when Richard Threlfall, KPMG Head of Infrastructure, predicted steady growth and gradually improving margins.

He said: “2015 has been a particularly ghastly year for many Tier 1 firms, who have been knocked off-course by losses on legacy contracts signed too cheaply in order to maintain volume in the depth of recession……….

“Weak profitability in the industry won’t improve overnight, but we can expect to see steady growth in order books and gradually improving margins. For the supply chain, the outlook is really good.”

A year on, the statistics suggest that the industry, both Tier 1 and smaller construction SMEs, have experienced mixed fortunes.

Some key construction industry statistics and pressures

According to the Office for National Statistics (ONS) most recent findings published for October 2016 construction output had decreased by an estimated 0.6% compared with September 2016. All new work decreased by 0.9%, with the largest downward contribution coming from infrastructure. This was despite an upward revision in the figures for the third quarter (Q3, July to September).  Even repair and maintenance, traditionally the preserve of construction SMEs, had experienced no growth.

Nevertheless, it said, new orders remained at their highest level since 2009, immediately after the 2008 economic crash.

Similarly, according to a Guardian report in November, construction work for office space in central London had reached its highest level for eight years, up by more than 4% compared with the period before June’s EU Referendum.

Chris Lewis, head of occupier advisory at Deloitte Real Estate, said the figures showed the capital was resilient.

That may be true for commercial property in London, despite the post-Brexit uncertainty, but what about housing construction, especially outside the capital?

Despite the evidence of considerable demand, particularly for affordable and social housing, here too, ONS figures showed that output had dropped by an estimated 1.4% in Q3, despite a slight upward revision in the figures.

Housebuilder Redrow noted, however, that housing was still up 8.7% when compared with the same period in 2015 as private new housing increased by 10.8% but public new housing – a much smaller part of the sector – fell 3.1%.

Undoubtedly there are pressures on the construction industry not least the post-Brexit uncertainty and ongoing skills shortages.  The massive devaluation of £Sterling is also an issue, given that much building material has to be imported, particularly bricks, which are no longer produced in the UK and will therefore be more expensive.

The stagnation in the repairs and maintenance side can hardly be good news for smaller, local SMEs. It remains to be seen whether the announcements in the Chancellor’s Autumn Statement of increased spending of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points and of the promised £1.4bn for 40,000 extra affordable homes will be enough to ease the pressure on SME builders.

2016 review – an uneasy year for businesses

2016 reviewIt seems like a very long time since the then Chancellor, George Osborne, warned in January 2016 of a dangerous “cocktail of risks” facing the UK economy.

The British Chambers of Commerce (BCC) echoed this, citing volatile stock markets, plummeting commodity prices, a potential slowdown in China, a poor 2015 Christmas for retailers and uncertainty about the outcome of the referendum on the UK remaining in Europe.

March brought news of Tata Steel’s decision to sell off or close its UK steel operations, prompting fears for hundreds of jobs particularly in Port Talbot, Wales.  While by November Tata had announced it had agreed a deal with the various trades unions over Port Talbot, possibly safeguarding an estimated 8,000 jobs, the outcome is not yet 100% certain.

In April came news of yet another large retail collapse, this time BHS.

In the run-up to the June EU referendum there were signs of a marked slowdown in investment decisions, coupled with worries about skills shortages if restrictions should be imposed on overseas recruitment.

In June, of course, the outcome of the referendum was a majority in favour of leaving the EU and the first monthly Markit Purchase Managers’ Index (PMI) immediately thereafter showed that the UK economy had been shrinking at its fastest rate since 2009 with confidence in both manufacturing and services falling below the benchmark of 50.

The decision also precipitated a massive devaluation of £Sterling by 15% against the $Dollar and by 10% against the €Euro, which benefited exporters but was predicted to eventually feed through into higher prices for imports and increased inflation. In response, the Bank of England further reduced interest rates.

Another indication of slowing global economic growth came in September with the collapse of the South Korean company Hanjin Shipping, the world’s seventh largest container company.

However, on the whole business activity post-Referendum showed no marked signs of contraction and by November the monthly Markit PMI index was showing upward trends in activity in Construction and Services. But just this week the BCC was warning that the “business as usual” approach that had so far prevailed since was unlikely to last and that business optimism was “continuing to fall”.

At the same time, quarterly reports on business insolvencies have remained steady, showing only statistically insignificant increases.

Also in November Donald Trump won the US presidential campaign, prompting yet more concern and uncertainty, particularly about the impact on other economies, including the UK’s given his notably “protectionist” views as stated during the campaign.

What was 2016 like for SMEs?

The measures introduced in the 2015 Small Business, Enterprise and Employment Act started to come into force with April deadlines for UK companies to compile PSC (Persons with Significant Control) registers.  There were also changes to the taxation of income received from share dividends with the introduction of a new tax-free dividend personal allowance.

Pension Auto-enrolment continued and there was another potential worry for SMEs with the government’s proposals for businesses to file quarterly tax returns.

There was one bit of potentially good news in the April budget, when the threshold for business rate tax relief was increased to £15,000, which may be good news for small High Street retailers, once the outcome of September’s rates revaluations become clearer.

A change of regime in Government produced some recognition of the difficulties for SMEs with the new Chancellor, Philip Hammond’s Autumn Statement, promising extra investment in local transport and digital infrastructure as well as Rural Rate Relief being increased to 100%. But business costs are also mounting with increases in the national living wage, insurance premium tax and changes to NI rates.

The 2016 picture will not be complete, however, until the Christmas retail trading figures and the next set of quarterly insolvencies are revealed sometime in January 2017.

Is there a UK shortage of heating and building maintenance engineers?

advert for skilled labourTrying to book a good heating engineer when the domestic heating system goes wrong is a challenge and invariably involves a lengthy wait for an appointment.

The majority of such services at local level are supplied by independent SME traders, who invariably seem to be mature workers. Even Pimlico Plumbers are self-employed.

This would suggest that fewer people are coming into the industry and may indicate that there is a skills shortage. On the other hand, it might be that younger, qualified engineers are looking for direct employment with larger companies.

A closer look at the situation

Heating system breakdowns invariably happen in the depths of winter, often when the system is first switched on when the weather turns colder. In a climate like UK effective and prompt heating and maintenance services are essential.

How many domestic users remember to have the heating checked and the boiler serviced ahead of the onset of cold weather?   Even if they did think ahead there are still likely to be peaks and troughs in the demand for heating engineers since breakdown will be more common when a system is in intensive use.

The age factor may give us better clues as to whether there is a skills shortage in this sector.

Certainly, the Construction Industry has for several years been warning of shortages for all types of skilled and qualified engineers, and this has been used to account for the numbers of qualified engineering workers being recruited from Eastern Europe.

But there is more evidence available to support this claim.  The Building Engineering Services Association (BESA) commissioned research into the industry’s labour market, which was carried out by a Dr Mike Hammond, Director of Education and Research at Hammonds Enterprises Ltd. His findings were published in a BESA report ‘Future manpower and skills availability’ for its conference in late 2015 on the issue of skills shortages.

Dr Hammond’s findings predicted “massive” under supply in every sector apart from plumbing up to 2018, particularly in the heating and ventilation professions. He also suggested that many new entrants into the sector during and in the aftermath of the 2008 financial crisis had missed out on formal training.

However, we would argue that the problem has been building for much longer than that and in part originates in Government emphasis on and efforts to increase university graduate numbers, which had the effect of devaluing the more practical skills and qualifications.

The combination of factors has led to a “generation gap” of suitably qualified and experienced people. While the Chancellor’s Autumn Statement of 2015 announced a levy on large companies to pay for its new three million new Trailblazer apprenticeships, the levy is not due to even start being collected until April 2017.

Even if suitable apprenticeships were immediately available from then, factor in the time it will take to recruit suitable candidates as well as the length of training and it is likely to be several years before there is any noticeable narrowing of the skills generation gap.

UK Business winners and losers – is uncertainty to be the new normal?

businessman on uncertain road aheadThe numbers of cranes on a city’s skyline are often taken as an indication of the health and vibrancy of its economy.

Not only are cranes evidence of demand, money and resources but also of jobs, not just in construction but, eventually, for occupiers of the buildings.

Whether such observations hold true in the current economic circumstances is open to question.

The most recent Markit/CIPS monthly snapshot on construction for November, published on December 2, would seem to reinforce the impression of health showing construction activity expanding to an eight-month high, albeit purchasing managers are also reporting a steep increase in materials costs.

On the other hand, however, on November 22 it was reported that a large Manchester-based heavy machinery plant-hire group, Hewden, with 40 branches across the UK and a workforce of 750, had gone into administration. 251 people, many of them crane operators, were made redundant. The Guardian report said Hewden was owned by private equity firm Sun Capital Partners, which had warned in October that market uncertainty following the Brexit vote had adversely affected a number of large construction and investment projects.

Yesterday’s publication of the IHS Markit/CIPS purchasing managers’ index for the Service sector also showed a rise from 55.2 in November from 54.5 the previous month. But here, too, there was a note of caution from Chris Williamson, chief business economist at IHS: “Rising prices – often linked to the weaker pound – are a big concern, however, and suggest that inflation is set to lift higher.”

These examples illustrate how difficult it is for SMEs to assess what they might be facing in their economic future and how best to prepare for it.

Known knowns and known unknowns

There are a number of triggers that could affect what happens both to the UK, EU and US economies and there are plenty of question marks over all of them.

First and most obvious in the UK, as the Supreme Court hearing gets under way into whether parliament’s consent is needed to trigger Article 50, is the uncertainty over the start date, length and likely outcome of negotiations to leave the EU.

Equally it is unclear whether the lower value of £Sterling will encourage or discourage investment in the UK. However, the fluctuations in the Exchange Rate and their effect on £Sterling in relation to the $US and to the €Euro will doubtless continue.

Yesterday, £Sterling had risen against the €Euro following the Italian referendum on constitutional change, in which the Government was defeated. Where will this leave both the fragile banks in Europe’s third largest economy and also the EU economy?

Perhaps the biggest unknown is what will happen when President-elect Trump takes over in January 2017. How protectionist will he be? Will he follow through with fiscal stimulus, which is likely to lead to both inflation and a rise in interest rates and a shift from economic recovery to recession as happened in the UK’s Heath Government in the 1970s? This time with considerably higher personal debt there is less room for manoeuvre and in a much larger economy than when UK asked for an IMF bail-out.

Then there is the recent seeming resurgence of OPEC in controlling output and thereby the price of oil.

There are many uncontrollable factors in a globally interconnected economy that are likely to buffet any national economy and affect its businesses, regardless of Brexit and whether SMEs are trading locally or are exporters.

The omens are not good but inevitably for some SMEs the prospects may be fantastic and for others quite the opposite. What is sure, though, is that for the foreseeable future the uncertainty of unknown unknowns is the new normal.

It’s good business sense to show employees you care

Interestingly, despite the increase in businesses using models that rely on workers’ self-employment or zero hours contracts, we at K2 are regularly asked by businesses we are advising how they can engender loyalty among their key staff.

Assuming that employees are paid adequately, there is plenty of evidence that paying them more money is not in itself an appreciation of their loyalty or efforts.

If money is not the answer, then what is?

Christmas food hamperClearly, a business may try to use some kind of reward system to encourage employees to work even harder.

However, this will be futile where employees are already working as hard as they can, especially when their efforts may have been needed to save the business in difficult times.

Nevertheless, in an era of skills shortages, where a business has an effective, capable workforce it will want to keep those employees’ loyalty and to do this it makes sense to recognise their efforts in some way that is valued by the employee.

Christmas and the summer holiday periods are especially opportune times for showing employees some appreciation in a meaningful way.

A discretionary reward or bonus for performance can be powerful, especially at times when their expenditure may be higher than usual but the bonus need not be in cash.

A gift that recognises not only the employee but their family’s sacrifice if they have had to work longer than usual hours can work well. It could be a few hours off to allow people to prepare for Christmas or to allow a parent to attend their child’s nativity play.

How about a hamper containing seasonal treats that the family might not otherwise have and containing something appropriate for every member of the family?

Alternatively, food shopping vouchers before Christmas or a well-timed cash bonus in the cash-strapped month after Christmas, when the credit card bills begin to arrive, may be welcome, especially when many families are living pay cheque to pay cheque.

It takes a little ingenuity and thought, but showing employees that they are appreciated as individuals with other responsibilities beyond work can do wonders for their morale, their productivity and their loyalty.

 

UK’s proposals for restructuring businesses spread to EU

bankruptcy imageIn July this year we reported on proposals by the UK’s Insolvency Service for new legislation that would stimulate earlier intervention in companies in financial difficulties.

This month the European Commission (EC) would appear to have followed suit by announcing a similar initiative.

Both sets of proposals have similarities with the US Bankruptcy Chapter 11 system as a court process for corporate bankruptcy protection.

Among the UK proposals put forward for consultation were a three-month moratorium to prevent enforcement or legal actions by creditors, allowing for a breathing space for rescue plans to be prepared and considered and for businesses to continue trading during any restructuring and protecting continued supply of essential goods or services without being held “hostage” by suppliers.

The deadline for responses to the consultation on UK proposals expired in September 2016 and of the responses reported, more than two thirds supported the idea of the moratorium. The Government is now assessing the results.

The EC follows suit

The EC proposals are very similar to those proposed for the UK and aim to allow what it calls “preventive restructuring”, particularly aimed at SMEs and at harmonising insolvency practice across the EU member states.

EC First Vice-President Frans Timmermans said: “We want to help businesses to restructure in time, so that jobs can be saved and value preserved. We also want to support entrepreneurs who do fail to get back on their feet quicker, get out there and try again wiser.”

The EC proposals, now out for consultation, also identify the need for earlier intervention and action for companies in difficulty and also include a moratorium from enforcement action to allow for restructuring negotiations and protection from individual creditors trying to seize assets.

The proposals, according to commentators, are part of EC efforts to organise capital across Europe and seek to remove obstacles to the free flow of capital across borders.

Alignment of the UK and EU initiatives may be overtaken by the UK’s decision to leave the EU following the referendum in favour of Brexit but the proposals are still relevant for business and the restructuring industry.

Both initiatives, if introduced, should provide SMEs in UK or EU with at least some confidence that if they get into financial difficulties their efforts to restructure will not be further inhibited by complex negotiations with creditors and suppliers despite the different insolvency regimes throughout the EU.

A cautious budget from a cautious Chancellor in a dire economic situation

small business financeThere were no major fireworks in Chancellor Philip Hammond’s Autumn Statement given the true state of the post-Brexit referendum economy as revealed by the Office for Budget Responsibility (OBR).

The OBR forecast that Government borrowing will rise and revised its growth expectation for 2017 down to 1.4% from 2.2%.

As Guardian columnist Larry Elliot said: “Philip Hammond’s message was stark and clear. The result of the EU referendum in June means the economy has arrived at a reality checkpoint. Deep-seated weaknesses will be exposed….. The chancellor was candid about Britain’s woefully poor productivity record. He admitted that infrastructure was deficient.”

In many ways, it confirmed what many SMEs have been saying for some time.

Was there any good news in the Autumn Statement for SMEs?

In our wish list earlier in the week we hoped for some recognition of the importance of SMEs to the economy and wanted to see some practical commitment to investing properly and quickly in both improving the UK’s physical infrastructure such as roads and rail for freight transport, and real signs of progress on getting reliable digital infrastructure, such as high speed broadband, to the many SMEs that are based throughout the country in rural locations and small towns.

There was some of that in the promises of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points, £23bn to be spent on innovation and infrastructure over five years, more than £1bn for digital infrastructure and 100% business rates relief on new fibre infrastructure, £1.8bn from the Local Growth Fund to English regions and Rural Rate Relief to be increased to 100%.

It was something of a “swings and roundabouts” budget because at the same time, some measures will increase business costs, such as the increase of the national living wage from £7.20 an hour to £7.50 for employees aged 25-plus in April 2017, increases to insurance premium tax, and changes to National Insurance rates.

Will any of this come in time to make a real difference to struggling SMEs?

While small builders get a boost from the promised £1.4bn for 40,000 extra affordable homes and van delivery and freight haulage companies will breathe a sigh of relief that fuel duty will not rise, lettings and estate agencies will be hit by the decision to ban upfront fees to tenants in England “as soon as possible”.

Generally, 100% Rural Rate Relief and the emphasis on investment in local physical and digital infrastructure should help those rural and small town SMEs – if it doesn’t take too long and actually reaches those parts.

As CBI director-general Carolyn Fairbairn emphasised, the plans needed to be put into action: “That means Tarmac, tracks and telecoms being laid, and clear, deliverable timetables for major projects – only then will they act as a catalyst for investment, jobs and growth.”

SMEs: financial caution, fragility and risk in an uncertain world

small business financeSMEs in the UK are being super-cautious about finance according to new research on SME resilience carried out by the company Hitachi Capital Invoice Finance.

At the same time, their research has found, many are in a precarious position because they are relying too heavily on a single large client.

Some details from the research 

27% of the 500 SME respondents had put investment plans on hold and were not planning to make any investments over the next 12 months but were concentrating on survival, while 57% of them had not sought any external finance in the previous 12 months. 41% of them said they were using overdraft facilities to fund their businesses and more than half said they were worried that Brexit would not only impact on their access to finance but would make it more difficult to obtain credit in the future.

Another worrying finding from the research was the numbers of SMEs, 17%, where a single large client was responsible for more than 50% of their turnover while a majority said that their biggest client represented more than 26% of their revenue.

This combination of caution about investment and external finance and the exposure that relying to such a significant extent on a single large client does not paint a picture of a buoyant, robust and optimistic SME sector.

Are there solutions?

Clearly SMEs need to develop contingency plans to allow for the loss of clients in the coming uncertain and likely volatile months with the aim of having no more than 10% of their revenue from any one client.

A revisit to their growth strategy to reposition activity to more strenuous efforts at finding new clients to balance their income profile regardless of whether they are earning good money from a large client. While they are in this position it may be wise to revisit the sales targets and marketing budget and to invest more in their growth strategy.

It is also true that SMEs need to see some significant recognition of their difficult trading conditions from the Government.  In the last year or two they have had to contend with compulsory pensions auto-enrolment, a rate revaluation and the prospect of significant additional costs from the proposal for quarterly tax returns. More recently there has been the volatility of £Sterling on the currency markets since the Brexit decision and rising import costs and gloomy prospects for inflation.

Nevertheless, life could be made somewhat easier for SMEs if there were some significant recognition of SMEs’ importance to the UK economy and jobs and some practical commitment in tomorrow’s Autumn Statement to investing properly and quickly in improving both the UK’s physical infrastructure such as roads and rail for freight transport, and real signs of progress on getting reliable digital infrastructure, such as high speed broadband to the many SMEs that are based throughout the country in rural locations and small towns.

Let us see what tomorrow’s Autumn Statement brings us.

Van delivery businesses operate on very slender margins

van delivery serviceCourier and other delivery services that operate using vans do not need one of the three main types of operators’ licences required in the UK if their vehicles have either a gross plated weight (the maximum weight that the vehicle can have at any one time) below 3,500 kilograms (kg) or have an unladen weight of less than 1,525 kg (where there is no plated weight).

Generally, one of three business models applies to these types of companies. They are either companies that have their own vans, or they are one-man van companies or two-man van companies.

In terms of labour the two-man per van model, which specialises in loading and delivering such things as furniture and white goods, is the most costly to run.

But in all three cases the full costs of operating the business are going up significantly because of fuel price inflation, exchange rate fluctuations and the incredibly competitive market in which it operates. And the cost of vans and parts is likely to rise since the recent change to exchange rates.

Can van delivery businesses become more efficient?

Efficient fleet management is key. We came across a case of a company operating its own vehicles that had agreed to a delivery deadline for the goods from their factory.

However, one item was not ready so the factory manager decided to send out all those goods that were ready then have the van deliver the missing item the next day. This doubled the transportation costs and as a result crystallised a loss on the order. The factory manager had simply treated the van as a convenience and not a cost to be managed. There were many alternative options but all too often convenience is chosen without regard to cost or efficiency.

Another problem faced by some delivery companies is that they are operating under a franchise model using self-employed drivers. The recent ruling against Uber is likely to significantly add to these companies’ costs because they will have to comply with employment laws and the pay minimum wage unless an appeal overturns the verdict.

A third issue is the cost of warehousing where delivery companies are receiving goods into warehouses for onward delivery or storage and calling off. This model introduces the additional burden of tracking goods and having an efficient system in place to manage both storage, retrieval and delivery. While this provides scope for adding value and charging a premium, it requires investment and training which are all too often ignored and lead to the business failing.

One area that seems to justify a margin is handling valuable or specialist goods such as art or glassware. While it can take time to build a reputation, the relationship with customers can change from simply being all about cost to developing a partnership.

Manufacturers however are often wise to outsource deliveries which will allow them to focus investment and training on their factory.  But like the first example, duplicated journeys are expensive so deliveries need to be managed.

As to the van delivery companies, the competition in the market is fierce and it is likely that there will be considerable insolvencies as costs rise. Survival and profits are all about systems and volume, or specialism.

Business insurance – are you properly covered?

business insurance protectionThere are many situations that can be covered by various types of business insurance, some compulsory, others advisable but how does a business choose what is essential?

To some extent it may be about assessing the risk for a specific business but inevitably it will also be determined by how affordable non-essential cover may be.

Business insurance required by law

Most employers must by law insure against liability for injury to their employees arising out of their employment under the Employers’ Liability (Compulsory Insurance) 1969 Act. It should cover all the places where employees are working, whether in the UK or elsewhere.

The minimum level of cover is £5 million and businesses must both display copies of the certificate of insurance prominently where employees can see it and they are advised to keep a copy of the insurance document for a minimum period of 40 years.

The Health and Safety Executive (HSE) is responsible for enforcement and has the power to fine up to £2500 for any day when you are without suitable insurance. If you do not display the certificate of insurance or refuse to make it available to HSE inspectors when they ask, you can be fined up to £1000.

Other business insurance policies to consider

While not required by law other types of cover may be advisable and these will depend on the nature of the business.

Professional Indemnity cover, for example, is likely to be important to such businesses as legal and accountancy firms, architects & design practices and professional advisers.

For anyone selling products whether online or via e-commerce, it is important to have product liability cover in case a product they have either manufactured themselves and supplied or simply bought in and supplied causes damage to either a person or their home for which the customer may then claim compensation. Remember the Samsung phones that caused fires.

Public liability insurance is another business insurance that many would be advised to have, especially if members of the public, suppliers and others visit their premises, as is the case with retailers, but also if they supply a service that is carried out at customers’ premises.

The fundamental question to ask is whether there is a chance that your business activity could cause damage to the public or to their property. Lawyers love customers who are injured while in a shop.

Equally, where a business has contractors regularly supplying services at others’ premises and therefore using vans to travel and to transport expensive tools and equipment insurance cover against theft from the vehicle may be essential, as indeed are the obvious vehicle and premises insurances.

There are also lots of add ons to consider such as policies that cover production delays due to strike action or when equipment breaks or loss of profit due to flooding or fire, and many more scenarios that might be considered.

Where do you go for insurance cover?

The first step is to seek advice from any trade association of which your business is a member. It may be also that appropriate insurance cover is included in your membership fees. One example is the market traders’ association who provide insurance for those who sell goods at craft fairs, indeed many event organisers carry insurance that covers the stall holders.

Failing that, seek out a knowledgeable insurance broker, who can provide advice as well as discuss the pros and cons of the different policies. They can also search out relevant cover specific to the business’ needs.  That way cover may be more appropriate and affordable than a combined all-risk policy, parts of which may not be relevant.