Andy Beard is Mace’s global head of commercial and cost management
Without a deep and diverse supply chain, the construction industry and its ecosystem will collapse. The centrality of the supply chain to success is what makes the recent collapses of industry stalwarts so troubling. Stories about non-paying contractors and aggressive tactics are particularly disturbing.
“Reports suggest two recent high-profile insolvencies resulted in a combined £150m unpaid to subcontractors”
These actions not only hurt subcontractors, they are also short-sighted and could have much wider implications affecting 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 companies. Insolvencies are at record highs with some big names joining a long list of recently collapsed companies.
At Mace we have been advising on the risk of supply chain insolvencies for some time; Unfortunately, this is something we are seeing more evidence of, and the industry needs to come together quickly to avoid significant damage to the wider economy. This means, in addition to dealing with the consequences of the bankruptcy of the main suppliers, supporting customers and projects where there is a growing concern, with the aim of eliminating emerging risks.
More failures mean higher prices
Recurring themes cited by and about businesses that have been affected include Brexit, Covid, supply chain issues, rampant inflation and issues with cash availability. None of this should come as a surprise, but the constant stream of challenges has left companies with depleted reserves and the supply chain as fragile as ever.
In addition, issues around credit are a growing risk, with a recent Bank of England report also highlighting how conditions, particularly for smaller businesses, are tightening further. Current interest rates and long-term challenges around margins in the construction industry make it difficult to build an investment case where money returns more interest that is left in the bank rather than investing in a business in growth
The failure of contractors to stay in business has significant effects. Reports suggest that two recent high-profile insolvencies resulted in a combined £150m unpaid to subcontractors. It’s easy to see how one larger company collapsing would put additional strain on many others.
Eventually things will improve, but when they do, having a smaller supply chain will increase costs. Michael J Lonsdale was one of the few mechanical and electrical subcontractors capable of working on some of London’s biggest schemes. Without it, there is less competition for that job, and those left can earn more. The reality is that every company that fails today is one less that can bid on projects.
Another issue is the potential impact on the future workforce; volatility and insolvencies will not help the long-term picture of the sector. We face a severe skills shortage, and those who lose their jobs may not return to the sector. Similarly, an industry seen as unpredictable, and where jobs come and go, is not one that school leavers are likely to see as attractive.
Freeing up £5 billion of accumulated cash
It is unacceptable to deliberately act in a detrimental way, pushing smaller businesses, to unfairly benefit. Both the Construction Leadership Council and Build UK are clear about the importance of fair payment terms and the review of retention clauses in contracts such as the JCT. If these improvements occur, it is estimated that more than £5 billion could be immediately released to the sector, which would improve cash flow positions and reduce the risk of insolvency.
There are several ways in which all parts of the industry, from customers to their project teams, contractors and subcontractors, could collectively improve and increase certainty and predictability of delivery.
- Be an informed and informed customer. Invest time to understand the underlying health and resilience of supply chain companies, but also to understand their challenges and opportunities.
- Consider ways to improve payment positions, such as removing holdbacks from contracts, that can be acted upon immediately. When there are disputed issues, act with urgency to fairly close those claims.
- Value contractors who 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 program. Setting up the supply chain for success and leveraging the expertise and insights of companies will likely lead to better outcomes as we seek to navigate industry challenges.
It is clear that the construction industry is in a difficult period, and we all need to look up to understand what has gone wrong and what the solutions are. The most important thing we can all do is contribute to an environment where trust and collaboration come first. Sharing what we find and committing to change as an industry will not be easy, but it is essential.
