The coronavirus pandemic is arguably having a greater and more rapidly changing impact on the construction sector than most, with many projects halted overnight at the start of ‘lockdown’. Even before the outbreak, the industry was already experiencing Brexit-related uncertainty, and last September it recorded the biggest drop in new projects since the financial crash a decade earlier.
The crisis is likely to have strong structural effects on construction’s supply chain, some of which may not be felt until later in the year; even when a business starts work again, often they won’t see any cash for up to 60 days.
Global consultancy Mace suggests construction firms could see a reduction in turnover of £29bn in this year’s second quarter. It adds:
“There is a possible time bomb for smaller businesses … from the third quarter of 2020. This will only be exacerbated by clients deciding to withhold or delay payments and the end of the government’s job retention scheme.”
Meanwhile, according to the Office for Budgetary Responsibility (OBR), output could be down 70% in the second quarter of 2020, hitting cashflow significantly for those without adequate cash reserves or strong balance sheets.
Equally, for production lines and manufacturing plants, operating is only financially viable above a certain volume, while many building products are the same as those used on domestic projects. With many households freezing work, demand for construction supplies could slip below the breakeven level.
Government support packages are in place, but the Construction Leadership Council (CLC) says just one in 10 building firms which had applied for this emergency finance following Covid-19 disruption had succeeded. Around a third had had their applications rejected, while the remainder were awaiting a decision.
The Institution of Civil Engineers (ICE) indicates that some four in 10 firms were applying for this help to meet short-term funding needs, suggesting a reluctance of other lenders to work with the industry.
Challenges the industry was already facing
Historically, the UK’s construction industry has not seen traditional lenders willing to provide finance, especially where a loan is not secured against an asset, although more specialised lenders now serve this market.
At the same time, projects’ high upfront labour and bulk materials costs can have significant cashflow implications, as do many building schemes’ long lead times. And, unfortunately, the sector is also known for delayed payments and billing terms which are stretched out as much as possible.
Construction industry finance: the background
The construction industry has many sub-sectors and lots of mutual interdependencies, with main contractors regularly managing (and paying for) dozens of sub-contracts, each of which is often worth £50,000 or less.
Especially in the public sector, the industry makes wide use of framework agreements, or umbrella arrangements in which an organisation agrees with one or more supplier (including contractors, sub-contractors or consultants) on the terms for a long-term relationship during which the employer may award one or more contracts. So, it’s a strategic partnering relationship which, in practice, can range from a loose arrangement with preferred providers to something more formal.
External project financing can take the form of loans, shareholder funds, grants, venture capital, subsidies, donations, crowdfunding, and the like.
How we can help
Invoice Finance Connect works closely with the construction sector to help it overcome its challenges, and we understand the industry well. We’re keen to strengthen these relationships during the current crisis.
We work primarily with regional and local operators with turnovers of up to around £50m, matching them up with the best-suited lenders. Contact us to talk through your options.