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Construction: Navigating Unknown Waters

Monday, November 2, 2020

Construction sites are normally a hive of activity, with people working in close proximity to ensure that projects of all sizes, from the very small to large-scale super-structures, are completed with absolute accuracy. The builds normally go through a complex cycle of handovers, with several different sub-contractors coming to site to complete individual areas of expertise.

Given this hands-on approach, the idea of a global pandemic that requires social distancing (and in many cases complete social isolation) should in theory have bought the industry to its knees. Coupled with the fact that Construction payment performance is already a minefield, with numerous large contractors squeezing the entire supply chain from a cash perspective, COVID-19 could have devastated the entire industry.

Perhaps the most surprising and positive impact to come out of this is the huge improvement in payment performance across the whole industry. No one could have foreseen the collaborative approach that has occurred, with companies actively trying to pay on-time and in some cases early to support the sector. An industry wide improvement in DSO and in turn tighter cash management has meant that numerous companies are now sitting with surprisingly strong cash balances.

Government intervention

Equally, the numerous government liquidity schemes including VAT and PAYE deferral have helped to compound the improving cash positions. As with all temporary payment holidays the liquidity benefit will of course unwind, but with some scheme extensions into 2021, companies should be in a far stronger position to have the ability to pay.

The COVID impact has acutely sharpened the focus of all cash allocations and collections, meaning that credit control teams have worked tirelessly to chase and collect all monies when due. An interesting subtle shift has occurred where no account is now deemed ‘untouchable’, the old-fashioned views of not chasing key accounts and allowing payment terms to drift replaced with a new, efficient collections process.  Final accounts are now far cleaner, and retentions are being regularly chased.

On the face of it, construction insolvencies are at an all-time low, with figures showing that in the second quarter of 2020 they decreased by 38.4% compared to last year. This positive trend continued into October with just 7 companies failing.


Insolvency legislation

On the face of it this appears to be very encouraging, but it’s important to note the recent changes in insolvency law with the introduction of the Corporate Insolvency and Governance Act. One of the notable changes introduced is that of a moratorium procedure. Under this law, creditors cannot initiative insolvency proceedings against a company for an extendable 20 working-day period to determine whether a solvent restructuring can be implemented – a positive development intended to reduce the number of administrations across all industry sectors going forward.

Meanwhile, a temporary suspension in ‘wrongful trading’ legal action would appear anecdotally to have positively contributed to this recent reduction in insolvency levels. Yet it should be remembered that this provision is intended to expire and the previous legislation to resume at some point.

With a backdrop of reducing insolvencies and improving cashflow it is evident that throughout the COVID period construction has adapted remarkably well. That said, there are still a number of areas that are causing concern for the industry.

Office space

Without a doubt the retail world has suffered throughout 2020 and orderbooks containing large-scale retail projects are now being re-examined. In addition, there is a bubbling unrest surrounding office space, with some doom-mongers prophesying a systemic shift to working from home that will never reverse - effectively calling into question the viability of the entire commercial sector.

While the announcement of a second lockdown is a tough blow for the wider economy, it doesn’t directly affect the ability for construction to continue - sites will remain open with all existing COVID measures already in place.

The more important impact will come with the economic repercussions of lockdown mark two. Prospective mass redundancies in the retail and casual dining sector will impact mortgage approval rates, while the return of working from home will throw further doubt on office projects.

Yet despite the considerable pressures on the sector, there are positives. There will be a large uptick in warehousing space and supermarket growth. Furthermore, as construction is such a large contributor to GDP, governmental decisions to pursue large scale infrastructure projects will continue to supply vital work into the sector as it attempts to navigate through the unknown waters of 2021.

Written by Alice Bremner, Senior Underwriter – Credit.

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