Boom and bust in the construction sector Ben Cussons, Business Advisory Director, looks at the current state of the industry, and suggests some practical solutions for efficient financial management of building projects.
It may seem strange to be commenting on the troubles in the construction industry when the sector is booming and demand for supply is at unprecedented levels, but the past eighteen months have brought their own set of challenges and pitfalls that businesses should be aware of if they want to secure a successful outcome for their projects.
Anyone who has tried to organise building work or source some materials will tell you either: - Materials are extremely difficult to get hold of and if you’re lucky enough to get what you need to, the price has gone through the roof, or - Just simply getting a job booked in with a tradesman is very difficult and the wait times are significantly longer than was the case pre-Covid.
What effect is this having on the construction sector as a whole?
What does this mean for managers?
The nature of the construction business model requires a significant cash outlay at the start of a job which is then invoiced or applied for at various stages of completion. These staggered payments will include an element of profit which is used to fund the next job and with many projects simultaneously on the go, there will invariably be situations where cash from one job is borrowed to fund another as they progress. The result of all this is that when the margins are squeezed and the profit reduced there will be less of a cash buffer available to fund new or existing jobs.
Many large contracts that have started in the last six months will have been put to tender some time ago, and would have been quoted using the labour and material costs at that time, with a reasonable estimate for increases in the period from tender to commencement. In a competitive market where margins are already comparably low when compared to other sectors, many jobs are now being won with only a very modest profit margin factored in. As everyone is aware, the unprecedented price rises in the cost of labour and materials caused by supply chain issues, added to restricted production caused by social distancing in the workplace and, dare I say it Brexit, these already low margins are currently being squeezed even further.
Penalties for not delivering on time
But what happens when the budget and time margins have been squeezed to such an extent that your available resources run dry? We see this scenario quite often and eventually - inevitably - something has to give. The result is often an upset to the end customer, the sub- contractors and suppliers, and others along the supply chain where a bad debt running into a few thousand pounds can cause significant cash flow issues, a strain on personal relationships and, in the worse case scenario, the cessation of their business.
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