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How to cope with the crunch

Review your business plan and financial arrangements to counter the downturn

The woes of house builders are rarely out of the headlines and as they start to squeeze their subcontractors on cost, times are tough.

But it is possible to survive, and it is not too late to stop things getting worse if you act now.

The key thing is to be prepared. Adrian Mulea, director at Ernst & Young’s real estate and construction team, says: “The main message is quite similar regardless of the size of your business. You can’t over emphasise being prepared. It’s not too late. Well governed businesses are the ones that will survive.”

If your financiers are making rumbles about whether they can continue to support your debt, do not lose heart. Mr Mulea says that a well presented case will help.

“Understand the position yourself initially. Take advice from accountants or auditors. Then take the presentation to the bank. There is an amount of leverage in a well presented case.”

But there is a chance that a backer cannot finance you any more, in which case look elsewhere.

“Banks take different views of different risks. There might be another bank. They might charge higher interest or want security over more assets than you might have had,” Mr Mulea says.

Alternative finance

Other methods of financing could be an option says Arthur Todd, advanced engineering team leader at Business Link.

“Perhaps a fixed-term loan would be better than an overdraft, it might carry you through a difficult period. Factoring or invoice discounting are possibles but they are more expensive.

“But something that provides an advance on the funding is more important than the cost of it,” he says.

If a firm is too small to get a conventional loan because it does not have assets to offer as security, Mr Todd suggests looking at providers that come under the small firms loans guarantee, where the Government gives the lender a guarantee against default.

If things are getting tougher, look at what you can cut. “Plan in advance and you can look at the easy wins first,” says Mr Mulea.

“Firms know what their costs are. Benchmark yourself against competitors. Consider those around regionally, look at their audited financial information and see where you might be spending too much,” he says.

Think about your client relationships and how you can make them the best they can be.

“The industry at the moment is characterised by retaining quality clients. Knowing your customer and doing your best to make sure that relationship works on all fronts is vital,” he says.

And when bidding for new work, think carefully before you go for it, says Vaughan Burnand, chief executive of Shepherd Construction.

“Be careful about what you do and who you are involved with. Get involved with Building Schools for the Future or public sector work if you can. Winning work is a long job,” he says.

Cost pressures

Mr Burnand adds that main contractors are under pressure from developers to reduce prices, and feels that subcontractors must be realistic. “The supply chain doesn’t think that the boom can ever end and the high prices they are giving us they think they can sustain,” he says.

But do not focus all your energies on the clients. Think about how things are within the company and focus on your people.

Mr Mulea says: “Retention of your quality staff is crucial. Even in good times this industry is characterised by a shortage of skills. You must do all you can to try and hang on to them. Invest in the business and communicate with your people and listen to them.”

He also suggests involving staff in decisions as much as possible.

“You can engender an intrinsic atmosphere of loyalty if they are engaged,” he says.

Mr Todd says the future is relatively uncertain but this won’t last forever. “There’s certainly work going on and the nuclear industry will afford a lot of opportunity for people but it’s a mixed bag. There will be winners and losers. It’s going to get tougher before it gets easier.”

Business Link's advice

■ Plan ahead, be prepared for tougher times

■ Update your business plan

■ Do a SWOT analysis and action it

■ Know how the business is performing by using KPIs

■ Seek to improve gross margins and increase profitability

■ Monitor and manage prime costs, reduce overheads, eliminate waste
■ Minimise spending, lease fixed assets and don’t purchase outright

■ Maintain funds usage ‘well’ within available facilities

■ Avoid overtrading

■ Forego opportunities if it will starve the core business of essential funding

■ Have a contingency plan

■ Nurture your best customers

■ Pursue higher margin business – it is often available for the same effort as lower margin work

■ Where cashflow allows, increase marketing and market share at the expense of competitors. Take advantage of opportunities, utilise/maximise your ‘USP’

■ Working capital should be effectively controlled

■ Improve or enforce your credit control – avoid bad debts, know your customers in detail, ensure payment terms are agreed and understood, invoice properly and promptly and rigorously chase monies due

■ Reduce stock levels and release cash

■ Minimise your work in progress levels – seek deposits or stage payments on contracts (mitigate exposure)

■ Seek extended terms of credit from regular suppliers and pay on time to avoid risks, reduce delivery cycles or switch suppliers and systems to handle JIT delivery or reduce the number of suppliers

Helful links

■ For details of the small firms loans guarantee and a list of national and regional providers go to: www.berr.gov.uk/bbf/enterprisesmes/info-businessowners/access-to-finance/sflg/page37607.html

■ Business Link has advice on how to combat the effects of the credit crunch at www.businesslink.gov.uk/creditcrunch or you can call its helpline 0845 600 9006 for impartial advice

How to survive the credit crunch

Adrian Mulea, director at Ernst & Young says: “The danger is that the construction industry will relax during this time and not take preventative action to survive the credit crunch when it really hits.”

“The many construction sites and cranes that decorate the UK skyline may lull contractors into a false sense of security.

“We are talking about buildings that house shops, offices, restaurants, and private property – the familiar high street landscape and business districts - that help to fuel the development of the UK economy.

“Construction contracts require water-tight management to avoid poor decisions that inhibit profitability. Often, a drive to maintain momentum means that risks and issues do not receive the level of scrutiny and focus needed,” Mr Mulea says.

“When the fundamental elements of a contract are not challenged robustly, the chances of failure tend to increase.

“Directors need to be asking the following questions: Is the level of detail on projected cash flow adequate? Are forecasts prepared on a contract by contract basis? And on what basis are forecasts prepared?” said Mulea.

“Lenders may issue more restrictive financing covenants, less advantageous borrowing terms, or a straight refusal to lend.

“Above all, effective communication strategies with debt providers are vital. The efficient hedging of financial exposures will also help to provide certainty, and the ring-fencing of financing may help to avoid financial problems on a particular job spreading across the business.”

“Alliances with particular sub-contractors or partners have many benefits, but in financially pressured times, you want to be sure that, before embarking on such arrangements, you have backed the right horse. The consequences of getting it wrong can be many-fold, causing pressure on your own financial resources, additional obligations you did not contemplate and damage to reputation.

“However, the outlook is not all doom and gloom. There are some relatively straightforward processes and early warning mechanisms management and boards can employ to allow them to identify and deal with credit-crunch related issues. Moreover those contractors who can demonstrate a sound financial position, supply chain organisation and an excellent reputation for delivery, may well thrive given the significant opportunities available, particularly on the public sector infrastructure side.

“But the key for Boards will be to anticipate the particular crunch-related risks which impact on their business and to stay focused to ensure that the potentially damaging aspects of this period of uncertainty are managed appropriately."