We have been experiencing a rash of main and sub-contractors in the construction industry coming to us for advice because they have got into financial difficulty.
It has become clear that those who contact us have not been managing the financial side of their business. They generally pay wages, labour, sub-contractors and suppliers in that order but all too often not other bills, such as to HM Revenue and Customs (HMRC).
Another characteristic is that those who end up dealing with HMRC and debt collectors don’t tend to have good quality financial information.
It has also become clear that their suppliers have been tightening up on sub-contractor payments and this has been putting pressure on their cash flow.
Traditionally construction is a cyclical industry, where there are seasonal peaks and troughs as well as fluctuations in demand for building, often influenced by conditions in the wider economy. For example, the demand for commercial building construction has been diminishing in the uncertainty over the outcome of Brexit negotiations, as businesses hold onto their money and cut back on investment. These factors impact on margins.
In the housing sector given the lack of availability it might seem that there was a continuing, high demand, but again, the available cash for projects is limited, partly because there is a lack of government cash and local authority power to build those homes that are most needed – at the affordable end of the market.
At the other end of the scale, the property market has slowed as householders economise in the face of rising inflation and stagnating pay, plus, again the Brexit uncertainty.
How can contractors manage their finances to ensure success?
The pressure of ensuring an adequate work flow can lead to a sense of urgency in bidding for jobs at the lowest price, risking making a loss, and in taking on more work or agreeing to projects that there is insufficient capacity to handle.
It is also easy to bury one’s head in the sand, such as hoping HMRC won’t notice non-payment of CIS, PAYE or VAT, or ignoring their demands when they do; never a sensible long-term strategy.
All too often contractors succumb to factoring their book debts instead of getting help when they experience cash flow pressure. This often means they lose control of their business the next time they are subject to creditor pressure or get into arrears with HMRC.
Contractors generally need external support to help them manage their finances and in particular help them stay in control of their cash flow.
When pricing and bidding for work, contractors should not feel under pressure to win tenders at a loss just to keep the work coming in. Instead they should make honest assessments of each project and include a margin for overheads and profit. All too often premiums are ignored. Fixed prices also need a risk weighted margin to cover delays and unforeseen costs. It may be better to remove risk by retaining the right to use variation orders to cover unforeseen costs, external factors and inflation such as increased sub- contractor costs. Another approach is open book with an agreed margin.
However work is priced, contractors should walk away from projects that are not profitable and where they have any concern about being paid on time.
Once a contract has been won the contractor should keep careful track of the ongoing external and prelim related costs and constantly monitor profit and cash flow, ideally by trade.
Ultimately, success in a fluctuating and seasonal market means tight control but also whenever possible putting aside a proportion of the profit from the busy period to offset the leaner time.