Continued pressure on suppliers will weaken the supply chain
It is no surprise the construction industry continues to feel the pain in the current economic climate; an industry reliant on investment has struggled to survive in a market where growth has remained static for the past two years.
The latest total volume of construction output figures released in January 2013 by the Office of National Statistics (ONS) for November 2012 were estimated to have been 9.8% lower than in November 2011.
According to the Construction Products Association (CPA), dark times remain ahead. They are forecasting that construction output will fall by more than 2% in 2013.
Philip Duffy, partner at leading global financial advisory and investment banking firm, Duff & Phelps comments: “The pressures in the current market have been somewhat absorbed by the larger players but their survival comes at a cost to those that supply to them.”
“The lack of work available has seen instances where larger contractors have put pressure on their supply chain by delaying payment to the very cusp of agreed terms.”
A recent ‘State of the Industry’ survey by industry experts StreetwiseSubbie.com obtained responses from more than 140 specialist subcontracting firms and revealed an array of bad practices by main contractors, including late payment for public-sector work. Industry best practice is to pay subcontractors on public-sector contracts within 30 days, which is supported by UK central government.
However, the survey’s findings revealed only 55% who took part, were aware of this payment rule and only 4.8% of those who had worked on public sector contracts were being paid within 30 days.
Duffy adds: “This in turn puts pressure on already tight margins and leads to the suppliers attempting to pass on the pain down the line or continue to tread water which could have disastrous consequences.”
Furthermore, research by R3: The Association of Business Recovery Professionals estimated in November 2012 that 10% of construction businesses are only able to pay the interest on their debts but not reduce the debt itself – which by their calculations equates to some 24,000 businesses.
Philip Duffy:” The Government’s indication of reinvesting in the housing market to tackle the shortage of homes seems a welcome boost. But it might be too little too late to tackle the problems at hand within the sector. The main concern with mounting pressure on the supply chain is somewhere down the line there will be a collapse which could lead to a domino effect throughout the supply chain.”
“Growth within the sector is vital for the economy’s recovery so opportunities need to be explored to ensure there is room for manoeuvre within the market. It is essential for the larger players within the sector to consider their suppliers when remaining competitive. Suppliers in turn will need to be more stringent than ever on the basics within a project such as continuous monitoring for signs of distress and tight control on credit and invoicing. Taking precautionary measures in advance could preserve their business. However, without new investment there will be further casualties ahead and without action, contractors will struggle to meet demand when opportunities arise.”