Why coming out of a recession can be a dangerous time

Avoiding subcontractors going bust on the job may be even more of a threat.

There was a world of difference between Bellway’s record results and the latest missives from Britain’s biggest builder and the country’s wannabee Gucci. Balfour Beatty — construction’s own luxury brand fallen on hard times — is starting to rival Mulberry, with five profit warnings in two years, compared to four in one year from the purveyor of £600-plus handbags.

The causes of Balfour’s decline may be more prosaic than the whims of fashion: one potential interpretation would be that like many rivals, it took on fixed-price contracts with wafer-thin margins at a point when subcontract costs — which were variable — couldn’t be squeezed any more and in some cases went up.

That line sums up the industry adage that coming out of recession is a more dangerous time for contractors and subcontractors than fighting through the depths of the slump. Since then, input costs have soared and cashflow concerns have spread across the industry.

To underscore the point, Professional Concrete Pumping, one of Britain’s market leaders in concrete pumping, ceased trading a few days after the Balfour warning, reportedly suffering from “over-trading”. Its main rival, which was already at full capacity, reports that the phones have not stopped ringing since. This raises the potential for costly delays at a point when several big contractors appear to be struggling on numerous projects. I’ve heard talk of some very large financial black holes that would require more than a few Putzmeister M36 concrete pumps to fill.

The trade press is now awash not only with stories about supplier failures but also a series of high-profile departures among heads of UK construction divisions.

Mark Farmer, head of residential at EC Harris, published a timely research report, The Race to Secure Capacity, this month exploring supply and demand in the prime London resi market, but with worrying implications for other sectors in the capital and beyond. It predicts a “deliverability ceiling” of no more than 2,500-3,000 prime units being hit next year and then a curtailing of the planned annual development pipeline of up to 4,750 properties over the following four years.

Bellway reported already suffering from site delays. There is clearly going to be a fight on to secure professionals (salaries of staff such as project managers are reported to be approaching £100,000), bricklayers and ground staff and, of course, the bricks themselves.

Research by R3, the association for business recovery professionals, shows 135,000 businesses are currently negotiating payment terms with their creditors, up from 74,000 in February 2013. This rings especially true for construction: “The first flush of post-recession expansion generated plenty of cash for businesses, but now some are experiencing the side effects of growth, including over-trading and late payment. These can easily put organisations with expanding order books in a position where cash flow becomes a major headache.”

Many contractors and builders may have to pay the price to secure supplies and see margins squeezed (easier for the latter, now enjoying fat profits). Modest delays may be OK — buyers of three- and four-bed houses can often be palmed off with a few more incentives — but off-plan buyers of hi-rise, high-spec apartments may not be so easily placated.

And failures on site may cause delays to stretch from weeks to months, undermining cashflow projections for developers — particularly less established ones. An even greater threat is that should London prices start heading south, some of the “buyers” might try to do likewise. These supposed purchasers may in reality be off-plan investors who have only put down modest deposits. In the last development crash, these buyers tried to wriggle out of completing and often the developers lacked the wherewithal to pursue them. Any excuse, such as late or substandard delivery, could be employed.

Developers would do well to check the small print on their purchase agreements.

Alastair Stewart is building and property analyst at Progressive Equity Research.