I have often written and spoken of my optimism for the construction sector and the great strides being taken in innovation, quality, and sustainability.
These are certainly key trends in the industry, and the rate of change and progress that we are witnessing is truly phenomenal. I strongly believe that as a sector, we have some of the best and brightest minds at work, who can truly achieve phenomenal results.
However, as a global industry, in order to actually achieve the potential of which we are capable, we need to also ensure that we have created the right business environment for creativity and innovation to thrive.
Over the past few years, the construction industry has faced significant challenges. News of write-downs, losses and, more recently, liquidations, have sent shockwaves through the global construction sector. This has far-reaching consequences, both in terms of jobs lost, and also in the stifling of progress.
It is important for us, as an industry, to take a hard look at the business of construction, and ensure we create the right environment in which the firms and individuals can thrive, so that we can achieve our lofty goals of innovation, quality, and sustainability.
In recent years, through my position as managing director of AESG, I have been fortunate enough to be involved in some of notable success stories within the Middle East. I have also had the opportunity to see first-hand the various struggles that some in the industry are facing. This experience has revealed to me the issues that we need to collectively address.
The first of these is financial reporting. When speaking to an accountant recently, he was shocked to learn that we managed our accounts predominantly based on actual cash flows, and not billings, as if such a practice was so primitive as to have no place in the modern world.
I strongly believe in the old adage of not counting your chickens before they hatch, and this is no more applicable than when applied to cash flows in the construction sector, where disputes and delayed payments are commonplace.
Reporting billings before they are paid is also not the worst of it. Many firms in construction report revenues from uncertified work or variation orders.
Of course, while there is a need within a complex industry such as ours to report more indicators than purely cash flow, it is also important not to overlook this one very important metric.
This is would mean the boards and shareholders of construction firms have greater insights into the health of the business. In addition, being held more accountable to the actual cash flow of the business would create greater motivation for construction firms to review their cash position more effectively.
To make matters worse, focussing on metrics other than cash flow motivates firms to take business decisions that are conducive to positive reporting, but not necessarily to the medium- or long-term health of the business. A simple trawl through data on the London Stock Exchange shows a number of instances over the past decade when, just prior to entering liquidation or bankruptcy, a construction firm reported not insignificant profits in its previous year’s financial statements.
I do not profess to be an expert in the complexities of accounting – particularly in the intricate world of construction – but throughout my career, I have seen a number of firms fail despite the fact their recent financial reporting showed very positive results. This begs the question, do we need to rethink how financial reporting is carried out in the sector?