Dixons is the latest NI construction contractor to enter into Administration with EY being appointed yesterday (30th May) in what will be regarded as another blow for the sector and particularly the local economy in North Antrim.
The company had been turning over c. £25M per annum and with approximately 90 employees, a significant number of subcontractors and many suppliers, the impact of this appointment is likely to be felt across many business communities in Northern Ireland and beyond.
This isn’t the first construction company from Northern Ireland that has entered into a formal insolvency arrangement in recent times and its unlikely to be the last.
The Business Recovery team at CavanaghKelly take a look at the current state of the construction sector in Northern Ireland and consider what owners and management can do to reduce the risk of business failure.
How much of an impact is the political instability having on the construction market in Northern Ireland at the moment?
After the publication of the Northern Ireland Budget for 2019/20 in February 2019, which included a £130m reduction in expected capital spending, the Construction Employers Federation (CEF) issued a stark warning stating that approximately 36% of local contractors will make redundancies in the next 3-6 months if the ongoing impasse at Stormont isn’t resolved.
With the capital spend seemingly being reduced as more funds were allocated to the resource budget, the CEF stated the NI construction sector will now be “shouldering the burden of years of politicians putting their heads in the sand with respect to systemic and fundamental challenges which should never have been ducked”.
In short, there is undoubtedly a shortage of public sector work due to the lack of an Executive.
Whilst this won’t be as much of a concern for private sector operators, the challenge of achieving sustainability, especially in relation to public sector work remains.
What other challenges exist within the market at the moment?
The shortage of public sector work has meant that pricing has become extremely competitive (and sometimes uneconomical) in recent times and resultant gross profit margins have reduced.
In addition, business owners have had to deal with rising raw material prices and increasing wage costs at a time when they haven’t been able to pass these cost increases onto clients.
Worryingly, we also seem to be witnessing an increase in disputes between clients and contractors which often means delayed and sometimes reduced amounts being paid for work undertaken. This is particularly the case in relation to claims where work hasn’t been completed within a deadline with LADs (liquidated and ascertained damages) becoming more prevalent.
Many firms are also growing turnover extremely fast without the requisite working capital required to fund this growth. This is often referred to as ‘over-trading’.
Unfortunately, the above issues alongside the current economic and political uncertainty means that the present environment for many NI contractors is extremely challenging.
What can management do to reduce the risk of business failure?
Some of the simple yet effective ways to reduce risks are noted below:
- Prepare financial projections with scenario analysis – what if turnover falls by 20%? What if gross margins fall by 5%? What if our main client increases payment terms by 30 days or there are completion delays on our main contract? Consider all eventualities and consider how you would be impacted.
- Prepare job costings – and where possible, analyse and evaluate these during and after the completion of the contract.
- Ongoing monitoring of jobs – compare the actual costs and progress against the budget and timescales in the plan of works. Identify where the potential overruns are so that they can be managed and the financial impact can be reduced. The use of KPI’s are an invaluable management tool to identify areas of risk on an ongoing basis.
- Improve efficiencies – consider where efficiencies can be built into the business. Review the financial impact of delays in materials being on site, repairs due to poor workmanship or faulty materials. Consider all processes including job costings, health and safety, IT and people management to identify where process can be made more efficient.
- Avoid overleveraging – tying up working capital and cash in ongoing projects, and overinvesting in fixed assets that are underutilised are some common reasons firms will dip into their rainy day reserves and deplete all available capital. Without that buffer, construction companies face failure when an unexpected need for capital surprises them.
- ‘Don’t buy turnover’ - Picking projects that are the right fit for your business and going through a bid/no-bid decision-making process should be your first step. Doing your due diligence when estimating and job costing can help you avoid taking on work that won’t be profitable.
A view from CavanaghKelly
For contractors at this time it is vital that professional advice is sought as early as possible to avoid scenarios such as this. If a business is encountering cash flow problems, it is vital that the warning signs are spotted so that action is taken to remedy the problem as soon as possible. The earlier advice is sought, the wider the range of options available, increasing the likelihood of a positive resolution for the client.
As Licensed Insolvency Practitioners, CavanaghKelly can advise your Company on the options available should it find itself coming under financial pressure. Our guide to Business Rescue and Insolvency in available to download here.
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Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.