Construction Industry Pitfall Number 2: Construction Failures are on the Increase- How Can I Protect my Business?

This is the second in a series of articles we are writing on the construction industry and this one focuses on how to minimise the risk of failure.

Over the coming weeks we are putting together a series of the key pitfalls common to many construction businesses which we hope will be of interest to you.

Here are 4 common questions we are often asked:

1. Are my workers genuinely self employed?
2. Construction failures are on the increase- how can I protect my business?
3. There is never any cash in the business. How can I improve it?
4. CIS! VAT! The book-keeping is so complicated – how do I get it right?

The first article went out in early December so if you haven’t had the opportunity to read it you can access the article “Are my workers genuinely self employed?” here.

Pitfall Number 2- Construction Failures are on the Increase- How Can I Protect My Business?

Unfortunately construction failures are common place. In 2018 Carillion went down owing £7billion and bringing down countless businesses.

Sometimes it is impossible to avoid the collapse of a business but invariably there are actions all business owners can do to reduce the risk and ensure that even if the worse happened they can be up and running in next to no time.

1. Cash flow management

Poor cash flow management is a topic in itself and one we will explore in more detail next time. This is probably the leading cause for business failure in the construction industry and is due in the main to poor planning, poor credit control and greed.

In construction most business owners are obliged to provide some form of credit to their customers, whilst at the same time having to fund upfront costs for the contract in the form of payments to their employees, suppliers and subcontractors. Simple planning will identify the crucial pinch points to identify cash flow shortfalls. A budget will tell you whether you expect to make a profit or a loss. A  cash flow forecast will tell you the pinch points and identify cash shortfalls arising from areas such as credit terms agreed with both customer and suppliers, capital expenditure, loan repayments, CIS and VAT tax payments.

Once you have identified the projected cash flow the next step is collecting the cash. We will cover credit control in more detail in the next article.

Our final point in this section is one which some might find strange- greed. In construction there are generally large sums of money flying around. Huge amounts of VAT will be paid alongside huge amounts of  CIS and PAYE deducted from subcontractors and staff which will at some point need to be paid over to HMRC. These amounts are substantial and not the company’s money. However it often happens that directors use this money either to bankroll the company or even worse bankroll the business owner’s lifestyle!

With any business the key is time. Build the business for tomorrow not for today.

2. Pricing and contracts

 All business owners are keen to win work, but there is something about the construction industry which leads usually rational individuals to accept work from bad customers and/or pricing work at levels which are at best problematical and at worst suicidal.

First and foremost check out who you are dealing with. The construction industry is notorious for businesses shopping round to find a supplier they can knock. So make sure you credit check your potential customer. Be on the alert for new businesses and those with adverse credit history. Make sure your customers are deserving of your credit; don’t just credit search them on day 1 but check them out regularly or better still get a credit checking software where you can set up alerts for any changes in credit rating.

Price sensibly, make sure you include everything within the scope of works and check every calculation. When margins are keen a missing item not quoted for or an arithmetic error can be the difference between a good profit and potentially running a contract at a loss!

Make sure you fully understand all the terms and the scope of your contract. This might sound obvious but we had one situation with a client who signed a JCT contract and then happily agreed to hundreds of “extras”. At the end of the contract he put in his final account expecting a huge profit only to be told to read his contract and that the contract was a fixed price build contract. He ended up with a loss and his business going under!

3. Quality & reputation

Again it might seem obvious but in every walk of life we expect businesses to provide a quality service so why should construction be any different? Poor quality work, safety breaches and late completion of projects all adversely impact your company’s reputation. Why cut corners and provide sub- standard work? Inevitably there will be a dispute, delayed payment or the non payment of a retention.

4. Your team and your management style

Quality and your team go hand in hand, so getting good people to work for you is fundamental. Keeping them working for you is another matter. Money is important but so is a good working environment. Nothing is worse than working for a tyrant or someone who just doesn’t care about his team. Cracking the whip may have worked in the past but in today’s modern work environment you don’t always get the most from people by acting in an aggressive manner.

This goes not just for the boss but also the whole management team. One bad manager can effectively destroy your company losing key workers and upsetting key customers.

5. Your business structure

You’d risk assess a job so why not risk assess your own business? Consider setting up a group structure or multiple businesses where you could ring fence plant and machinery, freehold property, lucrative contract work in a secure environment and keep high risk areas such as labour, project work in other companies. Why mix high risk activities with your crown jewels?

We have worked and helped build a number of construction groups so that assets are protected in the event of a company going under.

6. Growing too fast

This is effectively the same as 1, but where you now have multiple contracts and you are taking on more and more work. You are not allowing cash flow the time to build and are in effect growing the business too quickly and simply just run out of cash.

7. Good record keeping

It goes without saying that keeping good books and records is paramount. We will cover this in our fourth article.

We have unfortunately seen too many good businesses come to us with problems with CIS or VAT purely due to bad book-keeping. Over a period of time these liabilities can really grow and potentially reach a level where liquidation is the only escape.

This isn’t an exhaustive list just some of the reasons we have seen for SME building businesses going bust.

The reality is that in most situations where construction business owners go under and don’t recover it is because all their eggs were in one basket, one major customer went bust, the books were a mess so they got into trouble with the tax man or they simply just run out of cash through over trading. So here are our 4 big takeaways from this article which we would highly recommend you have in place for your business:

• Build a great legal structure- consider setting up a group.
• Avoid giving too much credit to one customer and monitor your customers’ credit rating ongoing.
• Keep your books in good order.
• Don’t run before you can walk- be cautious on spending and keep checking that cash flow.

If you have any points of concern we would recommend you speak to your adviser or call one of the team to discuss this further. Email us here.

The content in this blog is correct as at 08/01/2020. See terms and conditions.