Construction leaders must collaborate to avoid financial failure

Construction leaders must collaborate to avoid financial failure
Time to evolve: Construction outfits must improve their business practices to avoid failure
Published: 3 February 2018 - 5:52 a.m.
By: CW Guest Columnist

In the UK, the practice of implementing ‘pay when paid’ clauses has been outlawed under the UK Construction Act. This is not to say that the practice should be completely abolished in all markets, as main contractors may argue that they cannot bear the risk of non-payment by the employer for the entire supply chain.

Numerous contract mechanisms are available to better protect all parties, however, and to create greater transparency to ensure that those parties that deliver their work and obligations do get paid equitably.

Ultimately, it is the employer that suffers if the supply chain of their project is not paid. So, a number of employers in the market have implemented safeguarding mechanisms on their projects, and it may be appropriate to consider a more widespread adoption of such practices if we are to create the right environment for sub-contractors to perform.

Another point to bear in mind: there is a very good reason that people say cash is king. In construction, a firm that runs at a loss is likely to fail, whereas a firm that runs at negative cash flow will definitely fail. I find it perplexing that some clients take steps to squeeze the supply of cash to their appointed contractor, which affects the project’s supply chain in turn, resulting in inevitable failures.

A client appoints a contractor to build their project, and in essence, they are responsible for the delivery of the client’s investment. If they fail, the client also fails. It is flippant to disconnect the contractor’s failure from that of the client. I have seen first-hand instances where, due to squeezed cash flow, a main contractor or major sub-contractor has not been able to deliver. In these cases, it is the client that ends up footing the bill in the form of delays and cost overruns associated with appointing others to complete the project.

Contractors take on significant risk while working on construction projects, with significant outlays from the start. Even if the client has maintained regular payments, the contractor will often be in a negative cash position to the order of 20-30% when the various securities – such as advance payment guarantees, performance bonds, and retention – are taken into account.

In essence, contractors are being asked to take on double-digit risk for single-digit margins, and that is in the best-case scenario of timely payments. Therefore, a clear message for clients and developers is to maintain cash flows and payment schedules to their contractor, to in turn keep the supply chain healthy.

While it cannot be said that ensuring regular payments guarantees project success, I would argue that starving the supply chain of cash flow will guarantee project failure. It is that important.

As stated earlier, I am very optimistic for our sector, and strongly believe in the progress taking place in the regional industry, particularly around innovation and sustainability in construction. However, we must, as an industry, inwardly reflect and recognise that certain issues exist that need to be tackled effectively.

There is no single point of blame for these issues. It is a challenge that we need to collectively own, and we can only overcome it by working together. We need to collaborate in order to create business environments where everyone succeeds – the client, the contractor, and the entire supply chain.

If we are able to achieve this, we will create a win-win-win outcome that will not only help to ensure that the industry stays strong, but will also guarantee we create a built environment that we can be proud of handing over to future generations.

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