A dive into the construction industry
Recent data from Market’s Purchasing Managers Index (PMI) showed a boost in construction output in September growing at its fastest rate since March, to 52.3% last month, in comparison to 49.2% in August. The post-Brexit boost was driven largely by an increase in housing activity.
There are “resilient housing market conditions and a renewed upturn in civil engineering activity,” said Tim Moore of IHS Market; the company that carried out the survey.
“It has helped to drive an overall improvement in construction output volumes [in September] for the first time since the EU referendum and the US Presidential Elections.”
Figure 1: Chained volume measure, seasonally adjusted, Great Britain from August 2010 – October 2017
Source1: Construction: Output and Employment – Office for National Statistics
Projects occurring in the construction industry can be particularly challenging because delays mean that building works last for longer periods than initially planned. When it comes to managing customers, cash flows and contracts; overall financing of projects is crucial in order to complete jobs effectively.
But what challenges does the construction industry face in terms of sector financing and growth in a post-Brexit world?
Global Asset Finance spoke to www.globalassetfinance.com/trade-finance-services/ to do a deep dive into the construction industry.
Eye On: The Finance of Construction
The construction industry was worth some £103bn in terms of economic output in 2017, contributing over 6% of GDP2. The construction business cycle is one of the most complex and risky, given that there are multiple end customers, buyers and suppliers who work on different terms.
Juggling the settlement of wages and paying suppliers long before the main contractor settles final payments can create cash flow challenges and strains on working capital, but if you get it right and can effectively manage cash flows, then construction projects can reap rewards.
Some Tips for Success in the Construction Industry
For contractors and subcontractors, we’ve put together some tips and considerations, as well as stressing the importance of understanding the working capital flows throughout the cycle.
1. Know your customer, and know all of them
When working on a project, complications around whether the customer is an employer or a principal contractor can have a detrimental impact on cash flow. Often employers can be contractually and commercially demanding, which could affect the order in which payments are made.
In order to research your customers, look into whether they are creditworthy (perhaps from a credit reference agency), or you can look into whether they have had any County Court Judgements (CCJs) in the past for failing to pay creditors. Simple search engine research, looking into press coverage and social media can reveal a lot initially, without involving other agencies.
2. Understand your contractual obligations
If you’re a sub-contractor, you often won’t typically see the main contract between the head employer and contractor. Very often, clauses might mean that if the employer is insolvent, the main contractor may be entitled to not pay the sub-contractor, unless there is an enforceable ‘pay-when-paid’ clause. Seek professional advice from surveyors before signing.
Understand your obligations in terms of security undertaken should contracts be breached. For example, the beneficiary may take guarantees through bonds and warranties as security; so understand the scope of work being undertaken and the security implications.
3. Mitigate risk against financial losses
There is always a chance that parties involved in a construction project might lose out financially. That said, there’s no excuse for not planning meticulously to (a) reduce the chances of this happening in the first place and (b) know what to do if things go awry.
Seeking professional advice to go through your contracts with a fine-tooth comb and understanding all financial concerns, capital to commit up front, and a clarification of the scope of the work (to manage costs and expectations) is a necessity.
Particularly in the construction industry, understanding the implications of delays and how this affects customer payments / financial penalties is an important consideration for cash flow.
4. Financing the construction project
Working out the ongoing project costs is important when committing on construction projects. For example, the upfront procurement costs for raw materials should be budgeted, as well as the cost of paying staff, and having some form of contingency to ensure that a project is still delivered within a proposed budget.
https://www.globalassetfinance.com/construction-finance/ are also important. Try negotiating favourable terms with the supplier, and make sure your timelines are accurate and clear. Billing is also a consideration – being clear on payment date, payment terms and penalties for late payment should help prevent delays later on down the line.
As well as cash flow forecasting, there are several forms of external cash flow management tools which can help contractors and subcontractors understand their working capital requirements.
Having a safety net & financial backing can help you take on new projects, grow quickly and pay staff without having to rely on upcoming and overdue payments from previous customers.
Payment terms can be through financial instruments such as Purchase Order Finance, Invoice Finance.