The collapse of Carillion in early 2018 shook the construction industry to its core and, quite rightly, forced many firms to take a good look at how their businesses operate.
Now Insolvency Service data shows that construction insolvencies are up 12.4% year on year in the second quarter of 2018. Construction companies will want to avoid the same pitfalls that befell Carillion and take steps to mitigate any risk to their business.
Stuart Stead, partner and head of property and construction at leading accountancy firm Cowgills, looks at insolvency within the construction industry and suggests some early strategies to help companies protect themselves.
The most recent figures published by the Office for National Statistics (ONS) show that the construction industry has the second highest number of total company insolvencies.
In 2017 there were 2,792 company insolvencies within the construction industry. This accounted for 17.7% of the total UK company insolvencies in 2017, which were 15,749. Of the 2,792 construction company insolvencies, 896 (32.1%) were businesses involved in the construction of residential and non-residential buildings or the development of building projects.
These statistics, coupled with the collapse of Carillion during the same period, have led some in the press to speculate that over a quarter of UK construction firms could head into insolvency by 2020.
The risks can be mitigated
Many believe that companies like Carillion overstretched themselves, taking on risky contracts and expanding too quickly and widely. However, with the right help and direction, it is easy to avoid making similar mistakes and some simple tips are set out below:
– Cash flow
We often find that companies benefit from improving their management reporting systems which can help to flag potential problem areas as early as possible. Most companies control individual contracts well but there is often a lack of a holistic view of cash at corporate level. We also see a disconnect between the information produced by the commercial team and that of finance. A close relationship between the two needs to be forged and maintained so that consistent and robust decision making can be made.
– Pricing and competition
Construction output in the UK for the 12 months to June 2018 was almost £130 billion so it is not surprising that there is significant competition in the sector, especially for larger projects. With a high number of firms competing for jobs, work is price sensitive and sometime charging the lowest possible price might seem the best, or only, option for winning the contract. Unless there is a deliverable commercial strategy behind the decision to take on low-margin work then this should be avoided. It’s one thing to bring in the work to keep the team and supply chain busy but reducing prices in order to “buy in” turnover does not create a sound business base.
Due to the high number of insolvencies within the industry, the occurrence of failures to either make or receive payments has soared. The contractual nature of the sector also makes funders nervous which, in turn, restricts the number of lenders in the market and increases the pricing. There are solutions available, but they need to be carefully appraised. If the proposed funding solution isn’t modelled against the likely performance of the business, then it is highly likely that the cash injection and ongoing working capital support that was hoped for doesn’t materialise as anticipated.
– CIS Arrears
All construction companies have to verify their CIS regulation, deduct the correct amount and make the payments to HMRC, along with monthly statements to the subcontractors. But, if you withhold the payments because of cash flow then you can expect HMRC to be on your case.
As with other taxes, if you speak to HMRC as soon as you foresee a problem you may be able to negotiate an agreement. Don’t bury your head in the sand. Delaying HMRC payments is sometimes seen by businesses as a “soft option” but, having reached this point it usually indicates much deeper issues that need addressing quickly.
If your company is in financial distress, opening communication with creditors as early as possible may enable you to put in place agreements which will allow you to spread payments and hopefully avoid insolvency.
An informal arrangement costs far less to put in place and in the long run it is in your creditors’ interests that your business succeeds. Relationships are key, and the best strategy is not to over promise.
Cowgills has unrivalled expertise in all aspects of the construction industry sector and Stuart Stead and his team have an extensive network of contacts which can help struggling businesses. If you’re experiencing difficulties and are unsure of the best way forward for your business the sooner you seek professional advice the better.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.