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New dynamic for construction SMEs in 2015

There is no doubt that economic conditions appear to have improved for the construction industry over the past year, with a stream of new contracts coming to the market.

However, while many will look towards 2015 and beyond with optimism, fundamental risks still remain within the sector that companies must address and be protected from.

The recession has had a wide-ranging impact on construction in the UK. The lack of new building projects and the absence of cranes punctuating the skyline has been the most visible legacy of the slowdown.

A dwindling supply of contracts has forced many contractors to slim down their operations, severely cut costs and accept lower margins for work.

Steady growth strategy

The situation has been made worse by larger companies pursuing business down the value chain, into the next tier of contracts, to maintain a pipeline of activity meaning, that small companies in local, fragmented markets have often struggled to compete.

A combination of these factors has induced a significant rise in insolvencies and led to talent leaving the market, which has been hard for the sector to replace.

It is not only vital skills and experience of the industry that has been eroded, but also the capacity among suppliers of materials and building products, which is also difficult, costly and a lengthy process to revive.

“As activity picks up again, contractors could find it difficult to find the materials and human capital to take on new projects as quickly and as effectively as they would like”

As activity picks up again, contractors could encounter difficulty finding the materials and human capital to take on new projects as quickly and as effectively as they would like.

Much of the construction industry will already be running on tight margins and so any late payments or penalties from delays on contracts can prove disastrous.

It is essential that businesses operating in construction fully appreciate the new dynamics in their industry and the risks they present.

While pursuing growth and capitalising on new contract opportunities will be important, management teams must proceed with caution. Therefore a steady and sustainable growth strategy is paramount.

Diligent approach

In 2015, margins are unlikely to improve rapidly, with many contracts still set at pre-2013 rates, and demand will still fluctuate.

While infrastructure development and housebuilding is back on the government agenda and commercial activity is healthy within London and other major urban areas, construction is not back to pre-2007 levels yet.

Perhaps a New Year’s resolution for the industry should be to maintain a diligent approach to credit and working capital management.

Simple steps like keeping close to customers and an eye on debtor days and late payments will help protect vulnerable businesses as construction continues to move into positive territory.

Kalpana Padhiar is a risk underwriting manager and construction specialist at global credit insurer Euler Hermes

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