News & Events

Trade Credit: Sector Update – Construction

Wednesday, August 18, 2021

The last 18 months have delivered one of the most challenging trading environments many sectors have had to endure for a generation. The unprecedented market conditions meant that businesses had to rapidly adapt to a constantly changing landscape and adopt new and smarter work practices just to survive.

Businesses were suddenly thrust into the unknown, with many having to switch to aggressive cost-cutting measures to ensure their cash cycle would continue to turn. With this as the economic backdrop, it would be easy to conclude that the somewhat traditional, cash-constrained construction industry would fall to its knees, but in the U.K. at least, thankfully, that wasn’t the case.

The construction industry has a unique payment performance even in the best of economic environments. In a tiered system, the larger cash-rich main contractors dictate payment performance, which then filters down through sub-contractors and into the smaller players in the chain.

The thought of a global pandemic that caused businesses to review every payment due should have, in theory, meant that the poor payment performance normally experienced would deteriorate further. What we actually saw was a remarkable turnaround with a number of main contractors offering early payment schemes to ensure cash continued to flow down the subcontracting chain.

This payment improvement was seen throughout the entire industry with an unseen level of cooperation and collaboration. The switch of focus to cash collection meant that a large number of old disputes were resolved, and queries were handled more efficiently, resulting in a number of businesses enjoying their healthiest cash position in two years.

Unfortunately, as volumes increase, especially with the rapid expansion the industry has seen very recently, this “cash focus” is slowly starting to unwind, but it was, without a doubt, one of the most surprising COVID effects the industry experienced.

The reason for this will never be entirely clear—and this is perhaps an underwriter’s cynical view— but we would assume that self-interest played a major part. The larger contractors realised they would not be able to complete their contractual obligations to clients if a significant number of their subcontractors failed in a short period of time. It would be a wonderfully positive legacy from this period if some of that behaviour became ingrained in payment culture.

Activity in all sectors effectively shut down in early March 2020 as the national lockdown commenced, but the industry was quick to respond and came up with safer working practices to ensure their sites could remain open once key worker status was established.

The strongest driving force was the growing infrastructure workload, and in fact, it was the only element where output increased (0.6%) by August compared to February 2020. From a practical perspective, the lockdown worked in favour of several infrastructure projects, with easy access to shut down motorways, runway maintenance and vastly reduced public transport services, which allowed contracts to carry on running.

Obviously, social distancing had a notable effect on timescales, but everyone in the industry as a whole was in the same position and generally worked together to renegotiate sensible timescales.

Another surprising aspect seen throughout the pandemic has been the arrival of new funding in the industry. While the Government liquidity measures were welcomed, the more promising development was the growth in private equity transactions that completed during 2020 and into early 2021.

Whilst any difficult economic environment can drive investment into normally liquid companies experiencing difficulty, I don’t think that is what is driving the growth in investment that this industry is seeing.

High-profile deals, including the well-publicised Kier Living sale to Foster BidCo (owned by Guy Hands of Terra Firma), Wolseley UK being sold to Clayton, Dubilier & Rice, and the strong activity of Cairngorm Capital in the construction space, has seen a subtle shift in the options open to large-scale funding for construction companies.

Given the difficult cash flow cycles and payment terms involved with construction, it will be interesting to see how these investments track, but it’s an encouraging sign to see large-scale deals complete with such a challenging economic backdrop.

While construction fared well throughout the pandemic, it is important to note that overall output is still down by 30% on a like-for-like comparison. In fact, many companies found their marketplace had dried up overnight.

The infrastructure and housebuilding sectors continued to trade after some initial stalling, but the commercial space, hotel and leisure, and office fit-out sectors have been hit very hard. The uncertainty of overseas investment into large-scale, mixed-use schemes saw many projects delayed and, in some cases, completely cancelled.

The question of whether the U.K. will ever see a full “return to office” or a new hybrid work-from-home model has still not really been resolved, shaking the normally lucrative commercial office space market to its core. The long-term view is that, if the office market doesn’t recover, the space will be repurposed stimulating more work. While this does help long-term workloads, it does nothing to improve the prospects of a contractor struggling for turnover this year.

The industry has seen real signs of recovery start to come through this year, with overall construction activity expanding at the fastest pace since June 1997, supported mainly by a sharp rise in new orders. The seasonally adjusted IHS Markit/CIPS UK Construction PMI Total Activity Index signalled the strongest rate of output growth for exactly 24 years to 66.3 in June, up from 64.2 in May. Sharp increases in business activity were seen across all three main areas of the construction sector: housebuilding, commercial construction and civil engineering.


The forecasts for the value of underlying projects starts shows good growth across several sectors but with unsurprising contractions in the office and retail space.

 (Glenigan, 2021)

But while there are many positives to point to as the sector starts to emerge from the worst of the pandemic, the huge surge in work is starting to cause several new issues for the industry. Shortages of essential building materials are causing huge price increases, and Brexit is only compounding this issue, resulting in delays caused by many of the products being imported.

A recent survey by IHS Markit and the Chartered Institute of Purchasing Supply (CIPS) showed that the majority of respondents were paying significantly more for raw materials, pushing the Purchasing Managers Index (PMI) from an average of 55 up to 90 in May 2021. While the consensus is that the prices cannot continue to rise and will normalise, there is little evidence of this happening yet.

Adding to this pressure is the fact that the Government’s hiatus on pursuing insolvency action against another business has meant that the market is incredibly competitive. Whilst the reduction in insolvency rate may, on the face of it, appear positive, the market does need an element of healthy competition and business failure to ensure that tenders remain competitive and pricing sustainable.

The U.K. construction sector has undoubtedly performed strongly throughout the pandemic, but if history teaches us anything, the cash pinch points always come at a time of rapid growth. The Government has reaffirmed its support for the sector with a strong push to “build back better,” and this should provide confidence to the industry. The cash disciplines learnt throughout the pandemic need to carry forward into 2021 and beyond to ensure that businesses have the working capital to support these opportunities.

Written by Alice Bremner, Senior Underwriter – Credit.

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