With reports in the past week that almost 100,000 small construction businesses are now facing financial difficulties, this is an issue for employers, building supply chains as well as contractors. So, what is happening and what are the options to minimise the risk?
The UK construction industry mostly avoided the strict COVID-19 lock down requirements which applied to much of the rest of the economy – the Government accepted that carrying out building work at home was never an option.
While as a result most construction sites remained active during the pandemic, all projects have had to account for a considerable increase in health and safety compliance in order to ensure the safety of the thousands who undertake on site work. That factor and the recent introduction of changes in taxation applying to builders, and also that the construction industry often operates on perilously thin profit margins, all means that this is a sector which has not entirely escaped the many challenges which have impacted on other businesses over this extraordinary past year.
Right now, small and mid-sized construction businesses face particular pressure on working capital, profitability and cash flow. There is a risk to the jobs of the more than 250,000 people employed in this sector.
From the perspective of contractors and suppliers, as ever it will be of critical importance to maintain a degree of profit margin in undertaking work, and it has never been truer to say that “Cash is King”. All businesses need to have a regular and reasonable cash flow to pay wages and bills, to sustain their businesses in between income from projects. On the other side of the coin while larger contractors are usually better set up to deal with turbulence, the risk to the big boys/girls in the industry if they over-extend payment terms to their sub-contractors and supply chain, or if they add further hoops to be gone through before works and supplies are actually paid for, is to put the whole supply chain under pressure with consequences regarding work quality and the risk of insolvency.
For such reasons the industry is calling for a partnered and collaborative approach to help all parts of the sector work through this difficult period, and it’s not just the public sector employers who have a part to play in this regard. Making allowances for building material inflation pressures, focussing on qualitative features in the assessment of tenders and not encouraging a race to the lowest contract price, should be the considerations of all client types.
In fact, statute law is there to provide some degree of payment support in regard to public or private contracts. The Housing Grants, Construction and Regeneration Act 1996 requires that contracts for construction operations (building contracts, consultant appointments relating to construction works) must include a defined system making it clear what payments become due under a contract, and when they are to be paid. The Act also says that such contracts have to provide for a fast-track dispute resolution procedure – Adjudication – to provide a legally binding determination if payment or other disputes arise.
The 1996 Act though does not automatically apply to contracts which are purely for the supply of building materials, but the parties to such contracts could simply choose to write in comparable provisions anyway.
The potential damage to all parts of the construction industry from the loss of a significant number of supply chain businesses due to the sort of financial risks being identified is not to be underestimated. Ultimately, the pressures of rising material prices also being reported recently are a result of an increased demand for construction services. There is likely to be plenty of work available in the years to come. It will though take consideration from all involved in this sector to ensure that growth is not impacted by the industry having to first re-build itself, before it can properly get back on its feet and build for its employers.
If you would like more information on the topics discussed in this article please contact, Colin Jones by clicking here.