微密圈

The construction sector may not have noticed it yet, but the country looks to be heading for a recession. It happened sometime around September, when the Bank of England implemented the biggest single interest rate rise since the fall of the Berlin Wall. That rate rise is widely expected (including by the Bank) to push the country into a recession that could last two or more years. 

It is not all doom and gloom, though. The latest figures for construction output show that the sector remained surprisingly resilient to the broader economic malaise 鈥� at least up to September 鈥� and most of the industry leaders to whom 微密圈 spoke for this piece are not too alarmed by the Bank鈥檚 predictions.

Paul Ruddick, founder of prefab firm Reds10, says existing labour shortages could compensate for a drop in work 鈥� 鈥渆ven if demand dips, there is still not enough people to do the work鈥� 鈥� while Mike Hedges, director of Beard Construction, says the economic volatility of recent years means recession planning will have long been an agenda item at most firms鈥� board meetings. 

The next few years will be a very different experience than the cliff-edge recession experienced after the global financial crisis in 2008. Rather than a complete collapse of demand, we are likely to see a longer period of high variable and fixed input costs along with suppressed output prices from increased competition and weaker relative demand.

鈥淚t sounds like a bizarre statement, but a cliff-edge recession is easier,鈥� says Andy Reynolds, global chair of consultancy Rider Levett Bucknall. 鈥淚t鈥檚 more catastrophic and in that sense 鈥� it can force companies to make radical decisions to survive. The thing about this type of recession is the risk that companies don鈥檛 spot the danger signs for their business early enough.鈥�&苍产蝉辫;

It is vital, then, that firms take a prudent approach to business if they want to survive the downturn in good shape. 

DO Be flexible and ask what you can offer to more resilient sectors 

A focus on core markets may be the instinctive response to a difficult period, but according to Allan Wilen, economics director at Glenigan, it is important to be imaginative to secure a strong pipeline of work. 鈥淔rom a company perspective in terms of their workload, it is going to be a challenging time [鈥 so you鈥檙e going to have to be alert to the different opportunities that may be emerging,鈥� he says.

鈥淲e are looking at economic headwinds, but there are going to be bright spots, but they may not be the sector that you鈥檝e traditionally worked in or the companies you鈥檝e traditionally worked with, or in parts of the country, that鈥檚 you鈥檙e usually focused.鈥� He notes that the London market remains under pressure, with more opportunities in the regions, while sectorally the industrial and logistics market look likely to be resilient.

The Construction Products Association鈥檚 economics director, Noble Francis, agrees, noting that construction remains a 拢170bn industry 鈥� 鈥渟o there鈥檚 still lots of work out there鈥�. 

Francis continues: 鈥淭he key to weathering a slowdown is to focus on areas where activity will remain strong, even if it not in your usual area of work. Some of the other construction sectors will have niches which involve your area of work 鈥� look at where the opportunities are and don鈥檛 just stay in your usual sector and chase work, bidding low. That just exacerbates the situation especially with high and uncertain cost inflation.鈥�

Scott Smyth, founder and chief executive officer of consultancy Soben, says the geographic and sectoral spread of his firm鈥檚 work 鈥渘aturally hedges鈥� the business and explains how the firm plans to 鈥渄ial up鈥� specific sectors that will be less depressed. He adds: 鈥淚f you are looking ahead and you think that the sector you are in is going to be at risk, are there services that you can provide? Are there sectors that you can perhaps pivot into that are more buoyant?鈥�&苍产蝉辫;

DON鈥橳 Take work you cannot deliver to keep up revenue 

Smyth advises maintaining a 鈥渓aser focus鈥� on your bank balance and cash flow. 鈥淐heck payment terms with your clients and work with them to ensure you are paid according to terms,鈥� he says.

鈥淗ave your finance team seek agreement from the client early that the invoice is approved and on the system for payment.鈥� He also advises keeping enough cash to cover at least three months of your fixed cost outgoings. 

Sometimes you are better just stand still [鈥 downsize a little bit and ride it out

Paul Ruddick, Reds10

It is also important to remember that project viability can change quickly. 鈥淧roject viability shifts as market shifts [鈥 sometimes projects which you think you had won might go on hold and therefore you need to plan for that,鈥� says Reynolds, advising that firms work with clients to ensure jobs remain viable.

Maintaining a diverse portfolio of projects will therefore be important, to avoid putting too many eggs in one basket 鈥� but that is not to say firms should overstretch chasing revenue. 鈥淒on鈥檛 get into contract where you know you are going to lose money just to keep overhead costs,鈥� says Ruddick of Reds10. 

鈥淪ometimes you are better to just stand still and say, 鈥�you know what, we might just have to downsize a little bit and ride it out鈥�.鈥�&苍产蝉辫;

Simon Gorski, managing director in Europe for construction at Lendlease, agrees it is 鈥渂est to be honest鈥� with clients about what can and can鈥檛 be done. 鈥淩evenue is vanity, profit is sanity,鈥� he says.

鈥淚f that means you have to be a little bit smaller for a period of time, I think that鈥檚 better than trying to maintain a business plan no matter what the economic conditions are.鈥�

DO Focus on demonstrating your value to trusted partners 

Taking a 鈥渃onservative鈥� and 鈥減rudent鈥� approach to accounting can also help to maintain a good relationship with supply chain partners, according to Hedges. 鈥淲hat that financial security allows us to do is to be really good payers [鈥 what that leads to is a bit of security among our supply chain and a level of service that [means] when things get tough [鈥 we are able to rely on that,鈥� he says. 

Focusing on your relationship with trusted partners will be vital on the client side too. Francis says sub-contractors should focus on work with main contractors or housebuilders they trust as 鈥済ood, consistent work that you will get paid on time for鈥� is better in a downturn than larger quantities of unreliable income. 鈥淵ou don鈥檛 want to be in the position of having them come to you pushing out payment times or with them starting to keep more of the retentions,鈥� he says.

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Smyth says: 鈥淧osition yourself as a trusted partner with your client or customer, rather than being seen as a straightforward vendor [鈥 if you are truly a trusted partner of your client, then they will recognise the need to pay on time during periods of uncertainty.鈥�

Ruddick agrees that your best clients will 鈥渨ant to see you get through鈥� difficult times. 

In periods of uncertainty it is important to be decisive and protect the business 

Scott Smyth, Soben

Demonstrating value to good clients may be even more important for small contractors working in a difficult market, according to Francis. For residential repair, maintenance and improvements firms, aiming at the part of the market where homeowners are willing to pay to make sure the job is done well and on time is the way forward.

鈥淕ood small contractors are hard to find and trust is a key issue for many homeowners,鈥� he says. 

DON鈥橳 Allow blind optimism to cloud your business judgement 

If things take a turn for the worse, it is important to be prepared.

Smyth advises having a detailed and realistic plan to implement if turnover drops below a certain level. 鈥淎s business owners, we tend to be optimistic all the time, but I think in periods of uncertainty it is important to be decisive and protect the business if you鈥檙e facing some really serious economic challenges,鈥� he says.

Smyth worked for contractor R&D Construction when it collapsed in 2011 on the back of the financial crisis and reflects that there was 鈥渁n element of indecision and 鈥榙on鈥檛 worry, we have had a bad month, but this isn鈥檛 going to last 鈥� next month we will be OK鈥� 鈥�.

He says this experience has made him sensitive to the need for hard realism in business planning and adds that it is crucial to keep open communication with staff about company strategy during such a crisis.