Your credit facility has been withdrawn – is it time to close the UK Specialist Bank of Construction
The number of insolvencies in construction is a worry – over 4,000 businesses in the 12 months to April 2023. This is nearly a quarter higher than the previous year and a staggering 140% up on the year to April 2021.
It is significant too where winding up orders are coming from. Petitions from leading builders’ merchants increased by some 400% in 2022/23. There is a credit crunch in construction that is hiding in plain sight.
I write this in a week when three more main contractors entered various stages of insolvency. The statements are similar stating inflation, delays, challenges on key jobs and the cash dried up. It is a horrible time for all employees and the collateral damage is magnified in the supply chain.
Specialist contractors on live projects face potentially heavy losses, uncertainty on whether they will be retained on ongoing projects and unreleased retention
monies from others are now being used to pay Administrators.
When Lane End Developments, a Cheshire-based affordable housebuilder collapsed in April, the Administrator reported they owed 412 unsecured creditors a total of £11.8m. With Henry Construction it is likely to be even worse and may be the awful part is that none of the money they borrowed from the specialist contractors (almost invariably SMEs) was secured!
The true extent of this unsecured loan from the supply chain is significant. The first application date is unlikely to be 30 or 60 days into the job, which means that, even in the rare event of being on 30-day terms and paid on time, a specialist contractor has typically offered an unsecured loan equivalent to 90 days of labour and materials. This cash position is offset in part (the material part) by using builders merchants credit and at times extending this further by using a charge card. But, salaries need to be paid, labour is still often paid weekly and ultimately all the bills need to be settled! Specialist contractors live on a knife edge of cash, expected to fund the first stage of virtually all jobs, oftentimes jobs for major developers, multi-nationals (including Banks!) and the Government itself.
This isn’t new. Carilion was one of the biggest failings in UK corporate history, it decimated the supply chain. It isn’t new, but that doesn’t mean it is right! Politicians talked of lessons learned after Carilion, but nothing has changed and the risks have worsened. Beyond the obvious risk of fixed prices in the current climate, inflation means the jobs cost more and more and an “upfront loan” is required. At the same time, the cost of any capital (by virtue of
rising interest rates) is also higher. COVID and inflation have depleted working capital and the availability of traditional credit has reduced and credit insurance has all but dried up for most.
We talk of transformation in construction driven by investment in digital tools, process and people, but we expect most of this out of SMEs who are appointed late and sit on a knife edge. It is not a unreceptive or lazy supply chain preventing change, it is an industry starved of cash and beset with risk. The Building Safety Act 2022 will help change culture, it will put pressure on more responsible procurement, but it is not enough. To deliver wholesale change across the market we need to revisit the Housing Grants, Construction and Regeneration Act 1996 (aka the Construction Act). Through the Act we need to look again at how we capitalise construction with deposit, outlaw inappropriate risk dumping, place more emphasis on Project Bank Accounts (which have had a positive impact on public sector jobs in Scotland) and maybe consider licensing and bonds for main contractors to ensure those working on subcontracted jobs are protected from failings up the chain.
To unlock transformation and support a better sector, the Act needs to ensure SME specialist contractors are resourced to succeed, not abused and used as The United Free Bank of Specialist Contractors.
As we continue our focus on procurement practices and head towards the next General Election, this is the big focus now of the FIS Policy Team, the UK Specialist Bank of Construction needs to close.