The following article was published in the February 2009 issue of the Leicestershire Builder.

The building industry in Leicestershire is in for a tough time, but there is light at the end of the tunnel – if only you improve your risk management techniques, explains Michael Gerard of Michael Gerard and Co.

There’s no denying that the UK building industry is in for some lean times as the economic downturn continues. Last year saw a sharp decline in construction output compared with 2007, and the predictions for 2009 show an even greater drop. However, despite the warning signs which have been increasingly obvious over the past year, many in the trade will be unprepared for the adjustments that will need to be made. A fifteen year period of continual growth has enabled some companies to coast along quite happily without keeping their practice sharp and competitive.

This can no longer happen. Whilst many building companies will survive – and even thrive throughout the economic depression – these businesses need to ensure that they are operating competitively and with maximum efficiency.

Are the good times at an end?

Unfortunately, despite intensive regeneration in the city centre, Leicestershire is not immune to the general depression affecting the building industry. In fact, according to the most recent Glenigan report, the East Midlands region saw a drop in construction output of 26% in the last three months of 2008, whilst the value of planning approvals has halved from a year ago.

However, it’s not all doom and gloom. Areas such as social housing is on the increase in the East Midlands, whilst some large regional projects are also planned that will have a positive effect on the industry within our area including the £100m Leicester Tigers regeneration plan which, if approved, will completely change the Welford Road area, bringing opportunities for many local businesses.

However, to ensure that your business is around to take advantage of future opportunities, there are things that your company must do to ensure its economic survival during these turbulent times.

Risk Management

In the current economic downturn, there is a heightened risk of being able to secure your monies for supplying your goods and / or services. This may be as a result of protracted default, or insolvency or bankruptcy. Whatever the risk, such matters can have a significant effect on the company’s liquidity.

Traditionally, companies have been able to obtain Business Credit Insurance (“BCI”), which is an insurance policy and risk management product that provides cover for such risks resulting from the supply of goods and / or services. Such insurance will cover customers of the business that pays out an agreed percentage of an unpaid amount. The premiums are usually geared towards a percentage of a particular months’ sale and this type of insurance has proved to be popular over the years for obvious reasons.

However, recent months has seen a sharp decline of the availability of new trade credit insurance contracts, with leading insurers including Atradius, Euler Hermes and Coface, stating that the risk profile of all types and sizes of businesses had changed dramatically and they now expected far more reassurance before extending credit insurance to supply chains. In other words, it is becoming very difficult to secure trade credit insurance for new businesses. The Government has been made fully aware of the situation, but has so far stated that they have no plans to intervene. So how can a business overcome the risk without having a BCI in place? It is all about re-assessing credit control – and fast.

Contract

The economic circumstances present a greater degree of risk to your company’s profitability, so do all you can to minimise that risk. One way of achieving this is to have comprehensive contracts in place for every project. Whilst this might sound obvious, it is all too common for companies to be unaware of what they are actually contracted for in terms of timing, payment periods, rights of set-off, insurances, damages and even the mechanism for valuing change.

Ideally, you should use an industry standard form of contract in preference to a bespoke form: these are not only industry tested, but also make it much easier to be alerted to changes such as contractual set-off and ‘time is of the essence’ clauses.

Keep your cash flow healthy

Cash flow is a perpetual headache for many in the building industry - particularly smaller businesses. As the recession deepens, credit will become an increasingly significant issue for many organisations, so ensure you have mechanisms in place to guarantee prompt payment.

• Offer incentives such as discounts for early settlement.
• Run a credit check on the client before entering into a contract and never trade above your agreed credit limit.
• Consider introducing special terms in the contract such as retention of title (commonly referred to in legal circles as the Romalpa clause), and interest on late payment.

At the end of the day, no matter how attractive a project may appear to be in terms of turnover or profit, you need to get those payment terms sorted out – and stick to them.

Legal action is always an option, but court disputes can be long and expensive and there is no guarantee that your debtor will still be trading by the time of the hearing. Therefore, consider including in your terms other forms of dispute resolution like adjudication, the decision of which can be made binding.

Conclusion

There’s no doubt that the past few years have been exciting ones for those involved in the construction industry in Leicestershire and despite the gloomy predictions, there are still many opportunities for companies who have prepared themselves for the current economic situation. Use good sound business practice, take notice of the trends within the industry and be prepared to adapt and you will maintain your competitive edge. The next few years in the local building industry will be about the survival of the fittest – so take steps to make sure that you are one of them.

© Michael P. Gerard

Author background

Michael is a barrister, chartered builder, registered adjudicator and accredited expert in quantum and planning matters. He is also the Managing Director of Michael Gerard & Co www.michael-gerard.co.uk, a company of chartered building consultants and quantity surveyors based in Leicestershire.