Written by Mark Cooper
Posted on 13/07/2017

Dodge construction industry troubles

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It’s no secret that the construction industry business has been the hardest hit sector during the past five or six years.

Each year since 2010, it has posted between 17 and 20 percent of all insolvencies. Not surprisingly, it is the single major sector that has received the most claim pay-outs from credit insurers. Looking more broadly, the general insolvency statistics for the first quarter of 2017 are up 5.3 percent on the same period last year. This is the third successive quarter that these figures have risen. (This deliberately ignores the massive peak in Q4 last year when a large number of Personal Service Companies entered liquidation). 

Getting away from insolvencies, and adding to the construction gloom, the Office for National Statistics reports, “In May 2017, construction output fell 1.2% in both the month-on-month and 3 month on 3 month time series, both of which fell for the second consecutive period.”

It would be rash to assume the news will improve any time soon. And it would be sensible to assume that if there’s bad news around, the lion’s share will continue to come from the construction industry. If your clients and prospects are connected to this industry, it will pay you to monitor their activities very closely. Before we examine how best to do this, let’s take a closer look at some examples.

Size and ‘name’ are no guarantee of solidity. Just look at Balfour Beatty. Some of its problems resulted from the construction slump caused by the financial crisis followed by the coalition Government’s decision to slash public spending. It fought takeover bids and is now transforming itself under chief Leo Quinn’s Build to Last initiative. Another big one that’s hit problems is privately-owned Laing O’Rourke. It, too, was hit by the coalition’s cuts. It had built an advanced manufacturing facility with a particular Government project in mind. The project was canned. However, the Design for Manufacture and Assembly (DfMA) idea lives on and, in its second incarnation, it intends to manufacture entire homes, including blocks of flats, for on-site assembly. The CEO is confident that things are getting back on track, and there’s no question that factory-style manufacture of building components is a great way to go.

Many large companies similarly affected had no choice but to seek new markets. Some went overseas and found themselves obliged to get into joint ventures with local companies, not all of which worked out too well. Others looked closer to home and bid for smaller projects, becoming involved in a dangerous (for profit margins) ‘race to the bottom’ as they tried to compete with nimbler competitors on price alone.

All is not lost. It’s possible to get ahead of the game. If your business has any dealings with the construction industry, you really need to get early warning of impending trouble. Sometimes, public pronouncements from companies come way too late for you to take preventative measures. Do you rely purely on historical financial information when considering the strength of a new client or supplier? Do you have a finger on the trading pulse of your existing clients and suppliers? Even if they’re not directly in the construction industry, do they have close business ties there?

First of all, you can do much of this yourself, if you have the time. You already know about the obvious sources – Companies House filings, the Bankruptcy and Insolvency Register and suchlike. Unfortunately, these are generally backward-looking. A richer source could be one of the decent credit reference and credit rating agencies. They assemble their intelligence from a wide variety of resources, but most of them are likely to give you a historical, rather than an up-to-the minute, reading. To do this on your own, you need to systematically exploit your ‘grapevine’. These are all your contacts that have a trading relationship with your own clients, prospects and suppliers. They are the ones who will know if payments are being rejected, deferred or defaulted. Your success will depend on the type of relationship you have and your informant’s integrity. Better still, when checking out credit reference agencies, find one that has its own grapevine based on day-to-day intelligence being fed in from its own contacts, both locally and around the world.

Coupled with your own diligence, this should give you fair warning of upcoming troubles and a chance to adjust your trading relationships in plenty of time.