Construction Matters DRIVING LIFELONG PROSPERITY
In the last six months, coronavirus has had a significant impact on the construction industry and how firms have been delivering projects. With the increasing challenge of social distancing and, at times, a lack of resource of materials, delivering construction contracts continues to be difficult as companies adapt to new onsite operations. Whilst some sites remained open during lockdown, many took the decision to close for a period of time and the impact of this is now beginning to filter through, with some finding it difficult to fund ongoing projects and taking the decision to reduce their cost base through
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reduced headcount or direct costs. For those who have now returned to site, it is apparent that the level of output is not as it was prior to the coronavirus pandemic due to new safety measures and, therefore, the impact on margin for contracts is beginning to show. The office for national statistics has released information for the construction industry which show how significant the impact of coronavirus has been on the sector. For the period April to June 2020, construction output reduced 35% compared with January to March 2020, the largest decline in quarterly growth since records began in 1997. This is compounded by the fact that January to March 2020 had already been severely impacted by adverse weather and, therefore, the first six months of this year have been
Autumn 2020
particularly difficult and challenging to plan for. Since lockdown has been relaxed there are some signs of the industry improving. Of those businesses that responded to the office for online statistics, 97.4% confirmed that they were still currently trading, with only a small percentage of businesses still either temporarily closed or paused trading. In quarterly data released for June and September 2020, there was monthly growth across all sectors, albeit all types of work are yet to recover to their February 2020 pre-pandemic level. Still, this is showing promising signs and something from which businesses can gain momentum. It is not just companies that have been impacted, with self-employed contractors also feeling the impact of lockdown and reduced working.
The self-employed income support scheme (SEISS) was welcome news for subcontractors who had seen income almost turned off overnight and this is supported by the Government’s findings of the number of claims made per industry. By 31 July 2020, construction workers had made 884,000 claims for SEISS totalling £3.1 billion, an average of £3,500 per claimant. By 31 August 2020, construction workers had made 693,000 claims for SEISS second grant totalling £2.1billion, an average of £3,100 per claimant, suggesting a good proportion of workers were still impacted by the date of the second claim had become available. So, what does the future look like for businesses going forward and what can you do to ensure you plan for the road ahead? It is without doubt going to be a difficult period of uncertainty and some businesses will not make it through, so careful planning is needed to ensure you position yourself in the best possible situation to take advantage of any opportunities. Whilst furlough has been extended to the end of March 2021 and access to CBILS funding extended to the end of January 2021, keeping one eye on cash levels and requirements will not do any harm. Ensuring your forecasts are kept up to date for pipeline projects and their expected margins is critical
for managing both cash flow and resourcing requirements. It is important these are monitored regularly and flexed whereby new opportunities are identified or changes to contracts are known. With fierce competition for tenders at present and businesses chasing the same contracts, testing your forecast will see what a change in margin can do to your profit and cash position. A minor tweak in a contract might not have a significant impact on your position but multiplied across several contracts within your cost valuation report could see a major impact. Understanding what the likely impact of pipeline success rate is and the impact to the business will be important to assist decision making in the coming months.
CONCLUSION The next six months will be pivotal on the road to recovery and bringing back the good times to construction sites across the country. Businesses will need to continue to innovate and find new ways of working to ensure they can maintain output and identify new ways of working. As Government support continues to be reduced or phased out, those businesses who are finding it difficult need to carefully plan both onsite and internally to ensure they give themselves the best possible chance of surviving these uncertain times.
Cash will almost certainly be king and having either sufficient cash flow or access to funding will be paramount. For those who have already utilised CBILS, alternative means of funding should be considered, if required. Asset finance remains an option for those companies that are asset rich and own a significant amount of their plant. Some lenders will offer construction finance which is a specialist funding and support solution for contractors and subcontractors. Both are good alternatives to normal loans/overdraft facilities and provide flexible borrowing depending on where you are in the supply chain.
NICK HAINES Partner 01242 237661 nick.haines@hazlewoods.co.uk
DAN TOWN Director 01242 680000 dan.town@hazlewoods.co.uk
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Staverton Court, Staverton, Cheltenham, GL51 0UX 01242 680000 www.hazlewoods.co.uk / @Hazlewoods This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817. Registered office: Staverton Court, Staverton, Cheltenham, Gloucestershire, GL51 0UX. A list of LLP partners is available for inspection at each office. Hazlewoods LLP is registered to carry on audit work in the UK and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales.