Construction companies failing
Discussion
I've worked in construction for the last 20 years, and have seen booms and slumps in demand. However in the last two weeks I've had three main contractors I've used go under. All of them appeared to have pretty strong order books. I've seen companies go pop in recessions, but rarely in the middle of a boom.
Trouble is they've all then left some of their subbies unpaid, and they have gone under, or are now struggling for cash flow or to pay wholesalers.
I know retail and catering can be pretty volatile, and you hear of the odd rogue trader who goes bust and reopens in most sectors, but (IMHO) I never hear of so many failures in other sectors.
My question is, is the construction industry the exception or the rule when compared to other business sectors?
Trouble is they've all then left some of their subbies unpaid, and they have gone under, or are now struggling for cash flow or to pay wholesalers.
I know retail and catering can be pretty volatile, and you hear of the odd rogue trader who goes bust and reopens in most sectors, but (IMHO) I never hear of so many failures in other sectors.
My question is, is the construction industry the exception or the rule when compared to other business sectors?
Companies coming out of recessions (which we are still doing in many parts of the construction industry) are often at the highest risk of failing, especially if they have strong order books / contracts in place like you stated.
Prices rise in booms but companies have to stick by the contract values they agreed in the recession when labour and materials were cheaper. They can't buy things for what they agreed at and get taken down. It happens a lot.
Prices rise in booms but companies have to stick by the contract values they agreed in the recession when labour and materials were cheaper. They can't buy things for what they agreed at and get taken down. It happens a lot.
p1stonhead said:
Companies coming out of recessions (which we are still doing in many parts of the construction industry) are often at the highest risk of failing, especially if they have strong order books / contracts in place like you stated.
Prices rise in booms but companies have to stick by the contract values they agreed in the recession when labour and materials were cheaper. They can't buy things for what they agreed at and get taken down. It happens a lot.
Agreed.Prices rise in booms but companies have to stick by the contract values they agreed in the recession when labour and materials were cheaper. They can't buy things for what they agreed at and get taken down. It happens a lot.
Construction can move at a snails pace due to bureaucracy.
A small project of 5 dwellings I was recently working on resulted in a £60k loss for the developer as they got into a contracted position with a social landlord early doors. Unfortunately they had planning delays (12 months!!!!) and archaeological issues which by the time they started building had blown the budget completely on increased material and labour rates.
From my own experience the most dangerous thing that happened to my business was rapid expansion. More and bigger contacts meaning bigger credit, cash flow and costs, and lower efficiency. Found we were chasing our tales more and more. The other factor is the impossible task of finding really good staff in this sector to cope with more work, especially if you are doing anything requiring a bit of extra thought or pride. In the end I came close to going pop through stress, so started to downsize because turnover does not equal profit and if you really care about the end product there is simply no substitute for being on one site all the time.
I've seen a lot of firms go since I started, big and small, non of them were due to lack of work. Almost always because they'd bitten off more than they could chew, allowed themselves to get screwed, or directors kept taking too much out of the pot when it wasn't there to take. The first two I learned the hard way. The last I've never done. Probably why we kept going!
I've seen a lot of firms go since I started, big and small, non of them were due to lack of work. Almost always because they'd bitten off more than they could chew, allowed themselves to get screwed, or directors kept taking too much out of the pot when it wasn't there to take. The first two I learned the hard way. The last I've never done. Probably why we kept going!
My family business has been around 30 years in contracting (electrical) and has been through numerous recessions... most companies seem to fail now, after recession and it's because, as others have said, rapid expansion after a drought of work, those who survive the recession are either completely minted so it doesn't matter, or barely scrape through and have very little, if any, cash reserves.... but all of a sudden there's more work, less people to do it so companies take on whoever they can, prices continue to increase but job prices start to go down to keep all those extra people busy, before long you're working for very small margins, but people don't pay quick enough and there's no cash in the bank to avoid the inevitable. You then risk going from one project to the next project, with any profits you're making tied up in the cashflow.
Quite worryingly my family company has tripled in size over the past month. We really struggled to get decent people, there seems to be quite a lot of work out there though, fortunately we're pricing high and still winning, and I've secured two 12 month projects which ease the pressure (for now) but my cashflow forecast is really cutting it fine so I have to hope people pay, relatively, on time.
I think business owners lose a lot of money through recession then as soon as things start looking up they go all "i want my money back, NOW" and are potentially oblivious to the risk of taking on every operative that comes through the door and taking on every job possible, without expanding at the back end in the office or having adequate funds to support it.
Quite worryingly my family company has tripled in size over the past month. We really struggled to get decent people, there seems to be quite a lot of work out there though, fortunately we're pricing high and still winning, and I've secured two 12 month projects which ease the pressure (for now) but my cashflow forecast is really cutting it fine so I have to hope people pay, relatively, on time.
I think business owners lose a lot of money through recession then as soon as things start looking up they go all "i want my money back, NOW" and are potentially oblivious to the risk of taking on every operative that comes through the door and taking on every job possible, without expanding at the back end in the office or having adequate funds to support it.
I believe Crestell went pop recently.
Coming out of a recession can be one of the most dangerous times for a construction company. I am just finishing projects that were priced in June 13 - when the market was still flat. The upturn in asking rates for key trades must have been 50% or more. Things do seem to have calmed down now, though.
But we have a surfeit of work. I've just picked up £10m of work - all HA.
Coming out of a recession can be one of the most dangerous times for a construction company. I am just finishing projects that were priced in June 13 - when the market was still flat. The upturn in asking rates for key trades must have been 50% or more. Things do seem to have calmed down now, though.
But we have a surfeit of work. I've just picked up £10m of work - all HA.
That's all pretty much in alignment with my understanding, but what I was hoping was to see if the construction industry was unique or if it was happening in other industries in a similar manner as the recession changes.
From my own point of view, I don't think we've seen the end of things yet, with the Tier 1 contractors either making losses or very slim margins, and the likes of Tesco / Sainsbury's cutting back on developments.
http://www.constructionenquirer.com/2015/07/03/tra...
From my own point of view, I don't think we've seen the end of things yet, with the Tier 1 contractors either making losses or very slim margins, and the likes of Tesco / Sainsbury's cutting back on developments.
http://www.constructionenquirer.com/2015/07/03/tra...
Edited by GuinnessMK on Saturday 4th July 13:51
MrSparks said:
...barely scrape through and have very little, if any, cash reserves....
...You then risk going from one project to the next project, with any profits you're making tied up in the cash-flow...
...so I have to hope people pay, relatively, on time...
...oblivious to the risk of taking on every operative that comes through the door and taking on every job possible, without expanding at the back end in the office or having adequate funds to support it....
In other industries I'm not sure. Local to us we have the usual retail and catering firms come and go, but I think these areas are always pretty volatile with fickle customers. Other than that recently I can think the usual machinations in the finance sector but I don't know enough about that to know what's natural shape shifting and what's real failure. In terms of 'normal business' I can think of a large car dealership which went pop by surprise, again I think this was greedy directors and inefficiency rather than a lack of business. Also one of the largest motor body repair firms, the story there was over stretching with investment in new equipment I think. A big hotel which got pretty close to the edge due to poor judgement / possibly corrupt ownership but was saved by the tax payer so all good! Overall I think it's fairly consistent. At the moment anyway not many firms closing as a result of slow business, but a fairly consistent turnover of firms who sail close to the wind and every now and then one gets caught out. I don't know if my view is warped but the construction sector does seem to be bad for it (at domestic scale anyway), and I think the challenges faced in this sector are about as tough as it gets (feels like it to me anyway)!
I think it takes a certain type of person to grow a business. I found out the hard way I'm probably not that type of person so I decided to keep mine small. I think if you are the type of person who can grow a business you're probably also not shy of taking a risk or cutting a corner. Some you win, some you loose!
It's the same when working with the bigger commercial main contractors. Many basically have very poor cash positions vs the value of contract work so delayed payments from client(s) or cost overruns can send them under.
The first sign usually being sub contractor payments becoming increasing late and/or certified payment values reduced for spurious reasons. We've had two go pop on us this year both ultimately due to cashflow "issues". Our solution as subcontractor is to limit the value of contracts we will take with each contractor to level that wouldn't be fatale to the business.
The first sign usually being sub contractor payments becoming increasing late and/or certified payment values reduced for spurious reasons. We've had two go pop on us this year both ultimately due to cashflow "issues". Our solution as subcontractor is to limit the value of contracts we will take with each contractor to level that wouldn't be fatale to the business.
b0rk said:
It's the same when working with the bigger commercial main contractors. Many basically have very poor cash positions vs the value of contract work so delayed payments from client(s) or cost overruns can send them under.
Many companies in all walks of life depend on an overdraft. The recession showed how fragile and poorly run companies such as Woolworths were. But in boom times, that can be glossed over.Bear in mind the cash flow of a main contractor. Allowing fairly normal terms, they start on day 1, put their application in on day 31. QS has 5 days to certify and then terms are likely to be longer than the 14 default. Say 28 days. So we're at day 64 before a payment (is hopefully made on time).
Margin is commonly only about 5-6%. Retention will 3%. So you can see how fragile things can be. All of this takes no account of whether the works were properly priced in the first place or whether there are ongoing client disputes. It doesn't take much to upset things.
I know many main contractors can be s
ts - and I am glad I don't work for them - but you can understand why they can be so defensive of their cash position.Edited by rsv gone! on Sunday 5th July 07:45
rsv gone! said:
Many companies in all walks of life depend on an overdraft. The recession showed how fragile and poorly run companies such as Woolworths were. But in boom times, that can be glossed over.
Bear in mind the cash flow of a main contractor. Allowing fairly normal terms, they start on day 1, put their application in on day 31. QS has 5 days to certify and then terms are likely to be longer than the 14 default. Say 28 days. So we're at day 64 before a payment (is hopefully made on time).
Margin is commonly only about 5-6%. Retention will 3%. So you can see how fragile things can be. All of this takes no account of whether the works were properly priced in the first place or whether there are ongoing client disputes. It doesn't take much to upset things.
I know many main contractors can be sts - and I am glad I don't work for them - but you can understand why they can be so defensive of their cash position.
Several of my subbies run fairly chunky overdrafts. I just don't see the point. You've got to find the money anyway, and so you're just paying the bank for the privilege of always being a month behind instead of a month ahead. Its nuts. Never had one, and don't want one.Bear in mind the cash flow of a main contractor. Allowing fairly normal terms, they start on day 1, put their application in on day 31. QS has 5 days to certify and then terms are likely to be longer than the 14 default. Say 28 days. So we're at day 64 before a payment (is hopefully made on time).
Margin is commonly only about 5-6%. Retention will 3%. So you can see how fragile things can be. All of this takes no account of whether the works were properly priced in the first place or whether there are ongoing client disputes. It doesn't take much to upset things.
I know many main contractors can be s
ts - and I am glad I don't work for them - but you can understand why they can be so defensive of their cash position.Edited by rsv gone! on Sunday 5th July 07:45
I'm sure the standard terms thing is fairly unavoidable on big commercial stuff, but this is another area we decided to leave convention for the sake of avoiding the unnecessary headaches and costs as above. We don't tender for any work any more. The last one we were top price. It was later discovered that the winning bidder had 'left a few bits off' and our price was probably the only realistic one - I just don't see the point. Why pay top dollar for a group of professionals to create and manage a design process, to then hand it over to the lowest bidder?! It's just bonkers. If main contracting we always deal direct with client, no QS. We design and give them a price, and guarantee it against the same spec. If they find someone who can do it for less to same spec then no worries, but it hasn't happened yet.
I know we are very fortunate being a small firm in a very niche sector, in a very niche area, so all of our work comes word of mouth and / or a couple of small local shows (which is where it started). On main contracting design and build work we charge a lot more than 5-6% (though this is ameliorated by the VAT discount), deposit up front and generally no retention unless we are subbing. I know a lot of firms don't have these luxuries and I'm almost certain if I'd tried to start my business somewhere else in the UK I couldn't have made it work, but even when there is plenty of work some firms do seem to like putting themselves on the back foot before they start. Unless you're desperate why would you go in to a contract where you knew you were going to have to string out your subbies? And unless they are desperate why would they work for you if they knew that too?
Working capital
I've helped several, much easier when the get quiet as construction companies tend to throw off cash as they reduce (if managed properly), it's when they get busy again the issues start as they tend to have blown all their spare cash by then - either in losses as they fail to adjust or ongoing payments to the owners (smaller construction companies where it's the owners sole income stream, arguably the same, this may just be semantics)
I do generalise, I am sure someone else has different experiences, but I can only go on what I've seen
I've helped several, much easier when the get quiet as construction companies tend to throw off cash as they reduce (if managed properly), it's when they get busy again the issues start as they tend to have blown all their spare cash by then - either in losses as they fail to adjust or ongoing payments to the owners (smaller construction companies where it's the owners sole income stream, arguably the same, this may just be semantics)
I do generalise, I am sure someone else has different experiences, but I can only go on what I've seen
Low margins + negative cashflow = high probability of failure
It is the same throughout the industry & at all levels. One bad contract can bring down any contractor. Negative cashflow just strangles them.
Working for major contractors as a PM my primary responsibility is cashflow. My challenge is to establish contract terms that allow me to create a positive cashflow & then manage the contract to support that position. To illustrate how important this is, internally I receive a 1%/month charge or credit depending on my projects cash balances.
Companies fail as they grow even with profitable contracts if they don't manage their cashflow. Many contractors simply do not pay enough attention to cashflow.
It is the same throughout the industry & at all levels. One bad contract can bring down any contractor. Negative cashflow just strangles them.
Working for major contractors as a PM my primary responsibility is cashflow. My challenge is to establish contract terms that allow me to create a positive cashflow & then manage the contract to support that position. To illustrate how important this is, internally I receive a 1%/month charge or credit depending on my projects cash balances.
Companies fail as they grow even with profitable contracts if they don't manage their cashflow. Many contractors simply do not pay enough attention to cashflow.
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