Opinion: Major contractors, major problems?

Aaron Morby 9 years ago
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Cracks are appearing in the finances of major contractors showing all is not as it should be at many tier one players.

A recent spate of profit warnings highlights a spreading epidemic of financial problems that extends far beyond a few publicly listed companies.

Rumours are doing the rounds in the banking community that many of the country’s dozen or so biggest construction names are suffering a serious cash squeeze brought on by loss-making contracts.

Contractors have been caught by a perfect storm.

Projects that were won with rock-bottom prices or overly optimistic programmes are rising out of the ground into a world of eye-popping inflation for materials and labour.

The speed of the bounce back, particularly in London, has caught many on the hop who could be forgiven for expecting a slower recovery.

Overheating in the capital and parts of the south east is now a real problem for contractors hoping to trade out of their troubles.

Good subcontractors are now more picky about work, refusing to price packages unless their client has a negotiated contract or is preferred bidder.

There is less room to squeeze profits out of subcontractor prices and supply bottlenecks are a real headache.

All the signs are it is going to get a lot worse before it gets better.

What has been exposed by the swing in the market is a more fundamental structural problem in the industry.

Many main contractors have been steadily haemorrhaging cash for several years leaving them with low reserves and a reduced ability to ride out problem jobs as the recovery accelerates.

It has led some old-stagers to describe the crisis as the worse they have ever seen.

It is now obvious that major contractors can no longer count on operating at 2% margins, front-end loading client payments and delaying payments to subcontractors to make a business.

Clients have grown wise to managing their money.

And whether it is Government fair payment legislation or more demanding subcontractors – supply chain payment abuse is gradually being stamped out.

The reality is an urgent need for a new business model that allows firms to generate more sustainable margins of 4% or 5% without relying on holding on to other peoples cash.

This calls into question the whole business approach used by main contractors for the last 40 years.

Things need to change, and quickly.

If not the country’s ability to respond to recovering demand and deliver important infrastructure projects could be curtailed by a shockwave of major corporate failures.

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