Construction firms feeling the squeeze
Construction firms feeling the squeeze
The construction industry in the UK is under pressure.
Pressure from the government to comply with the Prompt Payment Code and pressure from the financial sector, who have had a “change in appetite” towards construction, pulling away from its exposure to the sector.
The biggest losers in this pressured environment are mid-sized construction businesses and their vital subcontractors, who depend on timely and consistent payment from their customers – the major industry players – to remain liquid, and to continue trading.
Shamed for failure to comply with the Prompt Payment Code
In recent months, 17 UK companies have been highlighted for their failure to meet the standard set out in the Prompt Payment Code (PPC). Under the terms of the code, 95% of invoices need to be paid inside 60 days, and firms need to demonstrate that they are actively working to improve payment practices.
Over a third of the firms hit by the purge on payment performance came from construction – and many are major players.
The most serious action has been taken against John Sisk & Son, who have been kicked out of the Prompt Payment Code, whilst six other firms have been suspended for unfairly treating suppliers.
They include: Balfour Beatty, Costain, Engie Services, Interserve Construction, Kellogg Brown & Root and Laing O’Rourke.
From the housing sector, one of the industry’s most profitable businesses, Persimmon Homes, has also been suspended.
Check when large businesses pay their suppliers
HMRC publishes up-to-date payment performance information on major UK businesses. You can search for a report that tells you:
- The average time it takes for a large business to pay its suppliers.
- The proportion of payments (for example, invoice payments) that it doesn’t pay on time.
Banking facilities restricted or removed
Successful mid-sized construction firms are finding their banking credit lines are being reduced or removed completely, with potentially dire effects on supplier relationships, liquidity, and the ability to innovate in this challenging market environment.
The simple fact is that cash being built up within a construction business is not going to be used to improve terms with suppliers. It’s going to be used to grow the business and to provide a cushion against any potential shocks.
Banks are taking a risk-averse strategy to the construction industry due to the prevalence of Applications for Payment and lack of more tangible invoices, resulting in a lack of financial products that embrace the sector.
Under such financial pressure, it will become impossible for many of these bricks-and-mortar businesses to keep up with changes in the market.
Vital subcontractors suffer with poor access to finance
Major players in the construction industry have committed to the Prompt Payment Code – yet many are clearly shirking their responsibilities.
At the time of writing this article, typically construction firms pay subcontractors on 47 days (source: Construction News). Our prediction – based on conversations with Woodsford TradeBridge’s many construction clients – is that these numbers will be pushed out further.
If banks are unprepared to extend lending facilities then it will be hard (if not impossible) for construction businesses to reduce creditor days.
With the major banks pulling away from lending to construction businesses, products like supply chain finance are having their day in the sunshine.
These more innovative working capital tools can make a real difference, quenching the thirsty cashflow needs of an unloved industry.
The impact on business liquidity
The construction industry typically requires more working capital flexibility than other sectors, and rightly holds cash to absorb shocks.
But the cascade effect of accelerated payment flowing down the supply chain can be quite significant.
A business with turnover of £25m that typically pays on 45 days, can greatly benefit subcontractor liquidity by offering an unsecured and flexible supply chain finance solution to bridge this revenue gap without weakening their own cash position.
This provides much-needed relief from a cashflow squeeze when liquidity is reduced by the banks’ reluctance to extend credit at a favourable rate.
Construction and engineering – a special case?
Woodsford TradeBridge has significant experience in the construction sector. We understand how the business model works, and can share our experiences working with other businesses similar to yours.
This allows us to make decisions much more quickly than alternative providers, relieving pressure on working capital when it’s needed most.
According to the financial director of one £200m turnover construction business:
“We like to think of ourselves as a pioneer in the use of mid-market supplier finance programmes in the UK. As our business grows, and with Woodsford TradeBridge’s support, we hope to continue to innovate.”
Download the full case study using this link.