Severe stress in construction sector supply chain
August 20, 2021
A key market: The construction sector
The construction sector is one of the UK’s most vital markets. Its importance in terms of its contribution to the efficient working of the economy far outweighs its 6% share of GDP. It employs some 2.3m people of around 7% of the total workforce.
Strong initial bounce back in the pandemic
After being badly hit in the early stages of the pandemic, the sector has done a miraculous job in adapting working methods to the endless restrictions and biosecurity issues. It was one of the few bright spots in the economy through the tough second quarter of 2020 and continued its recovery well through the first few months of 2021.
Hitting the buffers in recent months
Now it has been overtaken by a perfect storm of financial and operational issues. Output in June 2021 fell for the third month in a row, down 1.3% after falls of 0.8% in May and 2% in April according to the Office for National Statistics (ONS). Despite these setbacks though, the sector is still close to being back to February 2020 pre-pandemic activity levels.
Input prices are soaring
Material costs are believed to have risen by 15% in the past year because of global supply chain issues, the pandemic and Brexit. Now RICS is predicting a further 10% hike in the next twelve months. For an industry still addicted to overly competitive bidding with its wafer-thin profit margin consequences, this will be a disaster on many contracts. ONS figures show that output prices are currently 3.4% higher than a year ago, but this only a small contribution to remedying the problem.
Labour supply and costs
Labour shortages have long been an issue for the sector, now the situation is critical. There are suggestions that 1.3m people have left the UK workforce since late 2019, of which a significant number will have been construction workers originally from the EU. New immigration curbs are making the replacement of this pool of labour extremely problematical. There has also been a temporary but serious disruption from the ‘pingdemic’ phenomenon.
The inevitable consequence has been to force up labour costs. The construction payroll firm Hudson Contract reported that labour rates for 30,000 workers across 17 trades had risen by 19.6% in April 2021, compared to April 2020.
Not only are material costs rising, but key products are in short supply. Supply chain bottlenecks caused by the pandemic are one issue, but other factors vary from the global with increased economic activity in China to the local where the HS2 project is being accused of distorting the availability of materials. Unfortunately, no sector is an island in modern commerce, so the shortage of HGV drivers in the transport sector has exacerbated these material shortages by delaying deliveries.
Consequences in the supply chain
These multiple operational issues are starting to cause havoc not just with the industry’s output, but the stability of the supply chain. Anecdotal evidence suggests that valuation disputes have escalated sharply and that the adjudication process is not working well under this pressure, with unpredictable outcomes and the sorts of payment delays that are devastating for under-capitalised sub-contractors.
One sector expert talks of many sub-contractors being ‘beyond bare bones’ in financial terms. They took a big financial knock during the initial shutdown in the spring and early summer of 2020, which they dealt with by taking government guaranteed loans, using the furlough scheme and deferring VAT and PAYE liabilities. Figures from HMRC show that some 38% of all UK businesses took out one of the government loans.
Ending of government support
We are now in the end game for the government’s laudable efforts to prevent viable businesses from collapsing because of the pandemic. The furlough scheme, of which construction businesses have been the second largest users, finishes at the end of September as does the prohibition on creditors using statutory demands and winding up petitions to enforce payment. HMRC has already re-started its collection regime.
The initial one-year repayment holiday on government guaranteed loans has been running off since May 2021, compounding the existing problems where Bank of England research showed that even as far back as last January 8% of smaller businesses were already in difficulty with loans.
What next for construction businesses?
The sector has traditionally been the canary in the coalmine of the UK economy; always the first to report rising insolvencies in and after a financial crisis. Business failure has long been a major issue, with around 19% of all UK insolvencies being construction companies in most years. Formal insolvencies are already rising across the economy: company failures in June 2021 were up 19% on May 2021 and 63% higher than in June 2020.
In addition, figures from the ONS for business closures not involving formal insolvency show that 54% more construction enterprises closed down in Q2 2021 than in Q1 2020 and 24% more than in Q2 2019.
It is hard not to conclude that the inevitable culling of unprofitable and unviable businesses mortally wounded by the pandemic has finally started. There are tough times ahead for construction, just as there are for many of the UK sectors.
Finding the way through from surviving to thriving
The vast majority of construction businesses have a future. The trick now is taking the right steps to make sure they get safely through to those better times ahead. Asking difficult questions and taking tough decisions based on a realistic assessment of their financial and commercial position and prospects is vital. This must be done now, there is no time to waste.
Sometimes those questions and decisions are a process best gone through hand in hand with independent expert advisers, who have seen many similar situations and have the knowledge and experience to help management get this right. There is no shame and only gain in seeking help where it is needed.
How can we help?
If your business is experiencing cash flow issues or has an uncertain future, Opus is here to help. Our ethos is to engage with those facing difficulties with a constructive and positive attitude and not to judge. Contact us at email@example.com or call us your local office to arrange a no obligation and confidential call with one of our Partners.