Blair Milne: Recessionary winds afflict construction sector
Blair Milne, a specialist in the construction sector and head of restructuring with Azets in Scotland is warning that the construction industry – which employs in excess of 140,000 staff in Scotland – should prepare for payment freezes by clients as the risk of a cash flow lockdown looms over the sector.
Poorly documented contractual arrangements allow wriggle room for clients to delay payments or start contractual disputes. Cash flow then vanishes, staff, contractors and suppliers do not get paid and overdrafts are quickly breached. That is the tipping point for insolvency, creating a domino effect of business failures.
Documentation must be watertight, so clients are legally obliged to pay on time and are liable if they do not meet their obligations. Risks are also rising exponentially, from record inflation and shortages of materials and labour, making it difficult to budget and plan ahead.
The construction industry typically operates on thin profit margins and relies on flexible labour and sub-contractors working on a job-by-job basis. The model works well with a stable and buoyant economy, but is vulnerable to uncertainty and soaring costs, such as is the case currently.
The construction industry expands and contracts in line with the macro economy, but contracts quickly when confidence in the development and property sectors declines, and it is our view that the industry is on the cusp of another such wave.
Construction businesses should move quickly and ensure they have robust contracts in place and are methodically revisiting their business plans and costs, ideally on a weekly basis.
The tail of the property boom is still with us however consumer and corporate spending is going to come under severe pressure in the late autumn and onwards. It is highly likely that spending will contract and quite probably very quickly, so businesses concerned about the situation should take swift action to revisit their contracts, cut costs and seek advice sooner rather than later.
There are around 21,000 construction businesses in Scotland employing 143,000 with a gross value added of £7.8bn, according to Scottish Enterprise.