Natural selection in the construction industry

A number of high profile failures, caused in part by poor cash management, are forcing companies to reconsider the importance 
of their support function. 
So, just how sure are you that you couldn’t be next and how can you avoid a cash flow crisis?

Firstly we need to recognise that the smaller and medium sized firms have generally, for good reason, not kept pace at the same rate as the larger players with respect to constantly reviewing and updating their organisation, structure, processes and people. This situation is often exacerbated by the fact that people tend to move within the construction industry rather than joining it from other sectors.

But there is light at the end of the tunnel and the industry is slowly changing as firms increasingly recognise that cash really is king! So what is driving the move towards a greater focus on cash management?

• Changes in the structure of 
the industry. Over the past 10 years there has been a shift towards increasingly large and complex organisations delivering increasingly large and complex construction contracts. Fail to manage cash flow successfully on these projects at your peril.

• Changes in the supplier group. The increased involvement of Private Equity and a generally wider range of stakeholders has increased the focus on cash and how it is managed. This will become a greater factor in the relationship between suppliers and their customers.

The impact these changes have on the cash and working capital varies between industry sub-sectors. Working capital in house-building, for example, is very different from that in infrastructure projects. Indeed, it is within large infrastructure and construction projects where the greatest risks lie, but they also provide the greatest opportunity to improve cash and working capital management. So, what should you focus on to ensure that you aren’t a casualty of a cash flow crisis?

• Establish clear and unambiguous rules with regard to the management of variations during the tendering process, especially a two stage process;

• 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 ‘get things done’ attitude should always be complemented by agreeing revised cost when appropriate.

• When variation orders 
are required, ensure that support documentation, paperwork and signoffs are in complete order;

• Don’t be afraid to pursue claims and seek adjudication, even if they are disputed in the first instance;

• Whether you are a subcontractor or a main contractor don’t forget to manage back to back contracts as they can wreak havoc on your cash flow;

• Produce regular and robust cost to complete estimates;

• Keep on good terms with your bank manager!

While in the past the construction industry has focussed on growth and profit and therefore not placed a huge emphasis on cash and working capital management, developments within the industry and with the customer and supplier base mean that this is changing. Some companies are adapting to this faster and more effectively than others – the ones who adapt quickest are likely to see results on the profit and loss statement as well as on the balance sheet. As for those companies who do not adapt, don’t forget what happened to the dinosaurs!
 
For more information visit deloitte.co.uk or email c.sherwood@plimsoll.co.uk