The few last weeks have been very sad for the construction industry, with the financial failings of Paragon, Dawnus and Interserve causing serious knock-on effects for employees, suppliers, customers and shareholders of these businesses.
The primary breadwinners for hundreds – maybe thousands – of families are now out of work, entrepreneurs who have worked 60 to 70 hours a week for years losing everything, while customers with half-completed jobs are looking at months of delays to their projects, with worthless warranties and performance bonds that cover only part of their financial loss at best.
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This is no way for our industry to operate. In all industries there are winners and losers; however, the construction industry seems to have a disproportionate number of losers. The efforts various leaders in the industry are making to promote a positive image to teenagers, parents and teachers are being swamped by the terrible press surrounding our industry’s financial failings and the heartbreaking personal stories of individuals affected by these failings.
To me the cause is abundantly clear, too many companies are pursuing a volume of work beyond what their balance sheets justify, purely for short-term cashflow benefits. Venture capitalists make big bets with investors’ money, sometimes making great gains, sometimes losing it all: what could be described as “going on an adventure with other peoples’ money”.
In many ways, tier 1 contractors are doing the same thing, investing suppliers’ money in high risk/high reward speculative activities. If all goes well for tier 1 contractors with their high-risk ventures, they make tremendous returns and keep the upside; if everything goes badly, the supplier who has funded these activities pays the price.
Prequalification question
This way of operating is not ethical or sustainable and we need to move away from such practices without delay.
“By choosing a contractor with a good payment record they will likely have the best subcontractors and trades working on their projects.”
Government bodies who procure work through frameworks or select tender lists should have, at the start of their pre-qualification questionnaires, a pass or fail question: Is the average time for payment of your supply chain less than 30 days? If the answer is “Yes”, please complete the rest of the pre-qualification questionnaire. If “No”, please review your business model.
Customers, suppliers and advisers can research more astutely the financial strength of prospective trading partners before entering into a contract. Long-run profitability, balance sheet strength and balance sheet make-up all provide clues. In my view, allowing goodwill as an asset on the balance sheet is questionable, but the biggest clue to the financial strength of a business is how promptly it pays for the goods it has received.
The most perceptive private sector customers are exploring contractors’ payment records before choosing them as a project partner. In time, I hope this behaviour will become commonplace in both the private and public sectors – partly because customers are aware that the current level of financial failure in our industry cannot continue, but also because, by choosing a contractor with a good payment record, they will likely have the best subcontractors and trades working on their projects.
Suppliers can walk away
Suppliers should also be prepared to walk away from work where payment terms offered are significantly in excess of 30 days. Brexit or no Brexit, there are plenty of other opportunities to work for contractors who are pleased to pay for the goods they have purchased in 30 days or less.
It is pleasing to hear Build UK and many major contractors openly discussing their payment records. It may take a few years before all tier 1 contractors pay their suppliers within 30 days, as a number of them will have to make fundamental decisions about the breadth of activities they can afford to carry out – or raise new equity to support their cash-hungry ventures.
These will be painful decisions to make, but nothing like the pain employees, suppliers, customers and shareholders of Paragon, Dawnus and Interserve are suffering at this time.
Mark Beard is chairman of Beard Group and vice-president of the Chartered Institute of Building
