At the start of this new decade we had experienced the longest and strongest period of growth in the construction sector in our lifetimes. Forecasts were for a continuation of the growth and most businesses had strong committed and anticipated future work.
One week into lockdown, the headlines were forecasting the industry would be hit hard with wide scale collapses, job losses and financial ruin. Despite the doom and gloom, it does not need to end this way. There will be strong opportunities for those able to quickly adapt to both existing and emerging opportunities. Where are those opportunities?
Everyone was busy prior to the lockdown. All those current projects still need to be completed, with the only exception being where the client will be unable to pay. Doing this work will buy some time to assess where the future opportunities lie and what your strategies will need to be. The proviso is rapid innovation in site management so that additional costs and inefficiencies are controlled while maintaining social distancing and associated safe procedures.
Contractual rights on existing projects
Who will pay the ongoing overheads, P&G and wages during the lockdown and while we remain at alert levels that do not permit site work to occur at efficient levels? There are no definitive answers and many challenges. Have the contract provisions relating to a change in law been triggered? Has the contract been suspended, and if so by whom or by agreement? Does this give rights for extension of time? Each of these different legal routes provide a different allocation and responsibility for costs.
Fortunately, the Government has quickly announced that on Government projects the move to level 4 lockdown is a variation to a standard contract. This is a significant step towards providing some clarity and maintaining viable businesses for those on Government projects. Time will tell whether a similar approach will be adopted for non-government projects.
Whilst there is potential for a lot of legal arguments, collaboration and pragmatism between the parties may be critical so that the viability of the project and each of the contracting parties is not put in jeopardy.
Infrastructure Industry Reference Group
This group, established to identify “shovel ready” projects for fast tracking, started seeking suitable projects last week with an initial deadline of early this week. It will help but the criteria are limited so it will only benefit a small portion of companies.
The residential sector represents over half of the total construction sector and our housing shortage is unchanged. Additional Government stimulation and investment in the sector would provide immediate employment benefit and long term value to our housing stocks. Some commercial construction companies who see a downturn in their niches may pursue opportunities in residential.
Construction Industry Accord
The Accord is a collaboration between construction sector leaders and Government. After its establishment, initial substantive progress was limited. The Accord Steering Group have quickly shifted focus from industry transformation to industry resilience and recovery and have already started to demonstrate more substantive progress. The third phase; transformation, is the real opportunity for the sector to improve performance and use better and more efficient business practices.
Balance sheet strength
Because of the strength of the sector in recent years, many construction businesses are entering this new phase with relatively strong balance sheets. Whilst that strength can unravel quickly, it provides some short-term resilience until the new “normal” becomes apparent. This strength must be safeguarded and used wisely as it helps provide options for the future.
Gross profit margins have historically been too low but on average have steadily improved in recent years. It is important that where possible, these are maintained. In a perceived downturn some are quick to drop their margins to try to win work and keep the staff busy. This low margin strategy has led to losses in the past and does not generate the profits required to cover overheads. If a reduction in turnover is likely, maintaining gross profit margins is key to long term survival and health of the sector.
Nimbleness in quickly adjusting overheads to the new “normal” level and style of business activity will become a defining feature. Our benchmarking shows that a small number of head contractors can control their overheads at below 3% of turnover. These companies are well placed for the opportunities ahead. Too many have overheads over 8% of sales income, many with the desire to double turnover on that overhead structure. Those growth plans are now unlikely to occur so aggressive action is required.
We are all in this together and need to support our clients, subcontractors, suppliers and staff for our mutual benefit. This was demonstrated following the Mainzeal collapse where several head contractors provided accelerated payments and financial support to some of their impacted subcontractors so those subcontractors could stay in business and work on their projects. This occurred to a lesser extent after some of the more recent collapses. It will be important to keep the cash flowing promptly to maintain the necessary vitality in the sector
The country and the world have changed for good. Maintaining old strategies and behaviours will not be sustainable. The industry’s productivity has hardly changed for a long time. Those who can innovate quickly or have made major improvements already will have a competitive advantage.
The government have indicated that moving out of level 4 should allow most construction sites to reopen. If managed well, there is an opportunity for the sector to lead our economic recovery.