Andy Beard is global head of cost and commercial management at Mace
Without a deep and diverse supply chain, the construction industry and its ecosystem falls apart. The supply chain’s centrality to success makes the recent collapses of industry stalwarts so worrying. Stories about contractors failing to pay and adopting aggressive tactics are particularly disturbing.
“Reports suggest that two recent high-profile insolvencies resulted in a combined £150m unpaid to subcontractors”
Not only do these actions damage subcontractors, but they are also shortsighted and could have far wider implications that impact on the capacity and capability of the construction industry through a domino effect that further undermines UK growth and productivity.
Now is not an easy time for construction businesses. Insolvencies are at record highs with some big names joining a lengthy list of recently collapsed firms.
For some time at Mace, we have been advising about the risk of supply chain insolvencies; unfortunately, this is something we are seeing more evidence of, and the industry needs to rally together quickly to avoid significant damage to the wider economy. That means – in addition to dealing with the fallout from key suppliers going insolvent – supporting clients and projects where there is growing concern, with the aim of nipping emerging risks in the bud.
More failures means higher prices
Recurring themes cited by and about firms that have gone under include Brexit, Covid, supply chain problems, rampant inflation and issues with the availability of cash. None of this should come as a surprise, but the steady stream of challenges has left firms with depleted reserves, and the supply chain is as fragile as it has ever been.
In addition, problems around credit are a growing risk, with a recent Bank of England report also highlighting how conditions, especially for smaller firms, are tightening further. Current interest rates and long-term challenges around margins in the construction sector mean that it is difficult to build an investment case when money will return more interest left in the bank rather than invested in a growing business.
The failure of contractors to stay in business has significant ripple effects. Reports suggest that two recent high-profile insolvencies resulted in a combined £150m unpaid to subcontractors. It is easy to see how a larger company going under would put additional stress on many others.
Eventually, things will improve but, when they do, having a smaller supply chain will add to costs. Michael J Lonsdale was one of a handful of mechanical and electrical subcontractors capable of working on some of London’s largest schemes. Without it, there is less competition for such work, and those remaining can charge more. The reality is that every company that fails today is one fewer that can bid for projects.
A further issue is the potential impact on the future workforce; volatility and insolvencies will not help the long-term image of the industry. We face severe skill shortages, and those who lose their jobs may not come back to the sector. Similarly, an industry seen as unpredictable, and where jobs come and go, is not one that those leaving school are likely to view as attractive.
Freeing £5bn of pent-up cash
It is unacceptable to deliberately act in a harmful fashion, pushing smaller firms under, to unfairly benefit oneself. Both the Construction Leadership Council and Build UK are clear about the importance of fair payment terms and overhauling retention clauses in contracts such as the JCT. If these improvements take place, it is estimated that more than £5bn could be released immediately into the industry, which would improve cashflow positions and reduce the risk of insolvencies.
There are several ways that all parts of the industry – from clients to their project teams, contractors and subcontractors – could collectively improve and increase certainty and predictability of delivery.
- Be a knowledgeable and informed client. Invest time to understand the underlying health and resilience of firms in the supply chain, but also to understand their challenges and opportunities.
- Consider ways to improve payment positions, such as the removal of retentions from contracts – which can be acted on immediately. Where there are contentious issues, act with a sense of urgency to close out those claims fairly.
- Place a value on contractors that have invested in their supply chain and have a more strategic approach, as opposed to those with a project-by-project mentality.
- Understand and value the supply chain – treat them fairly as they are an integral and precious part of any successful project or programme. Setting the supply chain up for success and leveraging businesses’ expertise and ideas is likely to lead to better outcomes, as we seek to navigate industry challenges.
It’s clear that the construction sector is in a challenging period, and we must all hold up the mirror to understand what has gone wrong and what the solutions are. The most important thing we can all do is contribute towards an environment where trust and collaboration come first. Sharing what we find and committing to change as an industry isn’t going to be easy, but it is essential.