What next for the booming building industry?
As the construction industry emerges from Covid-19 restrictions, companies and individuals working in the construction, architectural, and engineering sectors want to know what the future will hold.
Although businesses in the sector were hit with site closures at the start of the pandemic, activity quickly recovered and it has been growing at a record pace for several months.
The construction industry is currently going through a very buoyant time. A recent survey reports the sector is experiencing its strongest growth in 24 years but severe shortages in products and materials mean firms are facing longer lead times and higher prices for components.*
Whilst confidence is returning to UK construction, there are challenges that still remain ahead. Here we look at what is happening in the sector and the issues being faced.
Increased demand in the residential market
Booming house prices have helped fuel activity in the sector. Growth has been driven by intense demand from home buyers as a result of the stamp duty exemption. With home working and rural living on the rise, progress on city centre commercial developments has slowed leaving some large inner city residential/office accommodation projects mothballed with no sign of these sites commencing again anytime soon.
Slow supply chain and price increases for materials
Lockdowns and a manufacturing slowdown across the globe last year, combined with a shortage of raw materials are having a big impact on prices. It has been estimated the value of timber alone has rocketed by circa 80 percent in the past year. There are also major shortages and price increases for steel and concrete, to name a few. A shortage of HGV drivers and shipping containers is also impacting and slowing the supply chain.
This shortfall in building supplies is making it more and more difficult for tradespeople and contractors to price their work as they did pre-pandemic. Prices are increasing so quickly that, depending on the length and size of project, this is now having a real financial impact on the overall material costs. This in turn is leading to difficulties in the tendering process as one small delay can be the difference between making a profit or a loss on the contract. Many are fearful of getting into financial difficulties, particularly those who have already agreed contracts that are yet to commence.
Supply issues are also leading to longer lead times and delays on site. This has a knock-on effect and the delays mean that prices are soaring, which in turn starts to impact on cashflow.
Lack of skilled labour as demand is outstripping supply
Rapid growth has boosted employment in the construction sector but there are concerns about labour availability as well as quality and the sustainability of the recent demand surge.
With the downturn in other sectors and the buoyancy in the construction sector, many are leaving their old jobs and commencing construction jobs with little training. This can lead to reputational disadvantages as well as have financial ramifications.
Covid loan repayments
Like many others, the construction sector was able to access Covid-19 support provided by the government at a time of unprecedented business interruption. The support packages included the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan scheme (BBLS), tax relief, the furlough scheme, grants and temporary insolvency measures.
These loans proved to be useful to many businesses during the initial lockdown phase. Also many have used them to take on bigger contracts and help them grow their business during this time, however, now they have to commence the monthly repayments towards these loans, even though their business may still be experiencing disruption from the pandemic. For businesses that are having difficulty in repaying the loans, there are options available. Please see the guide below if you or your business are having difficulties in making the repayments.
Currently our insolvency team is dealing with a few clients who have found themselves in the middle of a supply chain where the main contractor has not been forthcoming with payments and this has left them vulnerable as they have simply run out of cash at a crucial time.
Many clients are turning to us for help with cashflow management and management information requests to ensure that they are not the next one to fall foul of a change in circumstances. Good financial control is crucial to prepare for the challenges that lie ahead. Any business that may have overtraded using free/cheap finance will now need to keep a very close eye on their financial data to ensure that they have enough resource to continue through the next phase of the recovery period.
Cashflow and understanding your finances
As projects slow or are delayed the whole supply chain will start to feel the pinch. Whether the contractor cannot pay as the project is not finished due to supply delays or lack of demand for the finished article, this is felt all the way down to the tool hire shop on the high street. The business will need to be able to cope with this drain on cash. Companies should be familiar with their cash flow as “cash is king”. Ensuring the business has a handle on the cash in and out flow, can identify the need for new resource in different areas.
This will be crucial and should be reviewed on a timely basis. This will allow the business to be agile and can help with strategic decision making. It can be used to highlight deficits and additional funding requirements.
Work in progress (WIP)/debtor days/pipeline
All businesses should have a good knowledge of their WIP, they should ensure their WIP is billed up to date, and make sure that interim billing does not get out of control or behind on contracts who ultimately cannot afford to pay.
On the back of this, a review of debtor days and tight debtor control management is key to getting in the all-important cash once the work has been completed.
The pipeline of new work is also a key tool to effective strategy planning. If work coming into the business is slowing down, what is the strategy to kick start this again? It is prudent to be looking at your overheads to ensure you are not over exposed in any one area.
Mitchell Charlesworth can help you with detailed cashflow forecasts, preparing and interrogating management information and analysing current working procedures to ensure that WIP is turned into cash in the most efficient way. We can also help with new cloud accounting functions to bring the accounts department up to date and more efficient.
With the sector having a buoyant employment market at the moment, business owners are having to ensure that they keep up to date with the “going rate” for their employees. As noted earlier, the best craftsman will be in high demand and therefore can afford to shop around for higher pay and benefits. The pandemic has shown employees from all sectors that there is more to life than just working, therefore benefits to employees as well as good rates of pay can attract the best talent to the business. If you have the best talent and are able to retain them during this period, then the business should be in a good position going forward.
How we can support your construction business
We have worked with architects, engineers, and residential and commercial builders and developers for many years and fully understand the financial issues of the construction sector. Our innovative solutions draw together specialist tax, audit and business advice into a seamless service package that is tailored to the needs of individual clients, whether they are large corporates or smaller family-owned businesses. We can offer advice on structuring your business, tax planning and optimising cash flow to improve the running and profitability of your construction business.
If you have any queries regarding the issues mentioned in this article, please contact Mike Buxton or a member of the property and construction team:
*IHS/Markit CIPS report
Written August 2021.