Belfast Telegraph

It's time for caution in construction

Everything is not neccesarily rosy in the construction industry
Everything is not neccesarily rosy in the construction industry

By Nigel Birney, Willis Towers Watson

The collapse of construction giant Carillion earlier this year with debts of £1.5bn really put into sharp focus the precarious nature that the construction sector supply chain can find themselves in through no fault of their own, even when there is a perception that things are relevantly buoyant in Northern Ireland.

Locally, we are seeing a whole range of planning applications gaining permission, cranes going up around Belfast, house prices rising and the business pages of the media carrying stories about private developers stating confidently about how many houses they are proposing to build over the next 10 years.

However, things aren't as healthy as they seem. What we see on the surface isn't borne out behind the scenes.

We're not quite on the cusp of the turmoil witnessed in 2008 but we are in the midst of a situation that is seeing a creeping level of administrations in the construction sector as many companies can no longer afford to stay in business.  

The reality is that the construction sector is extremely prone to insolvencies and bad debt. Coupled with the current political upheaval, the environment is riskier than it has been in a long time.

Many of the credit insurance underwriters that we work with and those involved in the trade credit insurance industry are not confident for the immediate future of the local construction sector.

Recently, we have started to see underwriters become more circumspect when assessing applications for cover on local businesses trading in the construction sector and this is mostly due to a deteriorating financial position. 

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Our job is to source and recommend the right policy with an acceptable level of cover across a client's sales ledger, structured to cater for the peculiarities which exists in the construction sector.

This is becoming more difficult as the creditworthiness of many businesses weakens and the level of claims due to insolvencies in the sector increases at an alarming rate.

We only have to look at situations such as the precast division of Acheson & Glover which recently entered administration, putting around 100 jobs at risk, or the joinery firm Hayburn Wood Products. The latter specialised in manufacturing high end luxury kitchens and went out of business last week with the potential loss of nearly 60 jobs.

And the window and door manufacturer Camden Group based in Antrim has announced a consultation on around 80 redundancies. All those situations suggest that things aren't good.

The added uncertainty over Brexit has compounded the credit risk. What we are starting to see in these uncertain times are the chances of a least one of a company's trade debtors defaulting on payment increasing significantly. When this happens, it can put an enormous strain on cashflow which sadly can ultimately force many businesses to cease trading.

There is also evidence - in the construction sector particularly - that the average Days Sales Outstanding (DSO) figure is starting to creep up, which is a very worrying indicator and can have a very negative knock-on effect across the supply chain.

Another reason why the local construction sector is under financial pressure is directly attributable to the current paralysis of our devolved government at Stormont. Without a functioning Assembly and Executive, the through-put of larger scale infrastructure and building projects have been put on ice for the foreseeable future.

This not only means that potential winning contractors at the top of the food chain aren't getting any work, but all those companies within the supply chain, whether that is raw materials, finished products or services, don't either. Not getting the work in the first place is one problem, and another problem is projects starting with great energy and having to stop midway through with many contractors and sub-contractors left hanging and out of pocket.

In Northern Ireland the warning bells are sounding loudly for the construction sector behind the scenes and we must not get carried away with the perception that planning permissions and Grade A office space coming on-stream in Belfast city centre is in anyway an indication that things are normal. Far from it.

Despite the uncertainty there is no need for companies to place their very existence in such a perilous situation as non-payment, due to the unexpected insolvency of a customer or a customer's inability to pay, are covered as standard under a trade credit insurance policy.

An increasing number of companies trading in the construction sector and many other trade sectors are now using trade credit insurance to provide protection against the potentially fatal impact of not getting paid and for a small investment they can protect themselves from that one bad debt that could put them under.

The best advice is to trade prudently by having a robust credit control policy which best manages the credit risk.

  • Nigel Birney is head of trade credit Northern Ireland at advisory firm Willis Towers Watson

Belfast Telegraph