Is there light at the end of the tunnel?

Despite the current economic gloom, construction output in the UK is expected to grow slightly by two percent to approximately £79bn in 2010, according to analysis of the industry by Deloitte, the business advisory firm.

This is despite recent forecasts from industry commentators showing expected falls in construction output in the UK of between seven percent and 10 percent in 2009 to around £77bn, with the house building and commercial markets being the primary cause.

Industry commentators are generally agreed that the raft of new public sector projects, supported by increased Government expenditure, will be insufficient to prevent construction output falling steeply in 2009. In December 2008, the Construction Products Association (CPA) published a forecast predicting construction output will fall to £76bn, a level not seen since 2002 and the biggest annual fall on record. It is clear that this year will be a year for ‘battening down the hatches’ for what could be a prolonged period of stagnation.

Recent opinions from within the industry indicate that public projects within the education, health and transport sectors are essential for the short-term prospects of the industry. However, in the medium-term it must not be forgotten that there will be high levels of Government debt that need repaying, and this could lead to a cut in public spending. Therefore, we must hope that by 2010 the private sector has regained at least a modicum of momentum before the inevitable Government cuts are felt.

There are two main areas that a construction company must focus on in a declining market to ensure they do not become another casualty of the current economic and market turmoil: an unwavering concentration on cash and working capital, supported by a strong corporate governance and risk management.

Typical areas a construction company should focus on to ensure that they are not a casualty of a cash flow crisis, include:

Establish clear and unambiguous rules with regard to the management of variations, and claims.

Ensure that the natural tension in terms of cash flow between the design, construction and facilities management (where appropriate) phases are understood and taken into account.

Understand the limits of partnerships and so called ‘special’ relationships. The ‘getting things done’ attitude should always be complemented by agreeing revised costings when appropriate.

When variation orders are required, ensure that supporting documentation,paperwork and signoffs are all in place.

Don’t be afraid to pursue claims and seek adjudication, even if they are disputed in the first instance. Remember, developers are having an even tougher time and will potentially seek to dismiss a claim.

Whether a main contractor or sub contractor, don’t forget to manage back to back contracts as they can wreak havoc on cash flow-produce regular and robust cost to complete estimates.

Banks don’t like surprises so communicate regularly, keep them informed and don’t be afraid to discuss additional funding if you have a plan or an immediate need, but always think ahead.

While in the recent past the construction industry has focused on growth and profit, cash and working capital will be at the heart of every construction firm’s survival during 2009 and 2010. Some companies are adapting to this faster and more effectively than others. The ones which adapt quickest are most likely to preserve the Profit & Loss statement as well as the Balance Sheet. Those companies that chose to ignore the signals and do not adapt quickly could well be heading for some very difficult discussions with their lenders.

Nigel Shilton
For more information phone: 0207 007 6384
email: publicrelationsuk@deloitte.co.uk, or visit: deloitte.com