Like other sectors in Northern Ireland, the construction industry is currently facing a challenging trading environment. As the various supports provided during the pandemic come to an end, many businesses find themselves carrying extra supplier debt and/or under pressure to repay HMRC arrears and government-supported loans.
At the same time, companies tied into fixed-term contracts face procurement challenges for both materials and labour, while across the entire construction sector, energy and input costs are rising amidst uncertainty about security of supply. All of these factors, and the prevailing economic environment, combine in a perfect storm of tough trading conditions. However, while this makes it more challenging than ever to budget for projects and price work, there are practical steps that companies can take to minimise risk, protect their business and find new opportunities.
1. Recognise the warning signs
Early indicators that a business is entering financial difficulty typically include problems paying suppliers and/or HMRC, loss making contracts, cash flow difficulties, insufficient funds to pay wages, problems obtaining credit and/or having to introduce personal funds into the business. Signs like these need to be acknowledged and acted upon without delay.
2. Seek professional advice early
The earlier a company obtains professional advice, the more options it will have to resolve its difficulties. Potential solutions include entering a time to pay arrangement with HMRC, organising a simple re-financing of the business, analysing costs and improving performance. Depending on the severity of the financial problems, a formal insolvency rescue process such as a Company Voluntary Arrangement (CVA), Restructuring Plan, or Administration may be required. While these processes aim to rescue the business, it is critical that matters such as tendering, supplier terms and working capital requirements are taken into account. If the correct advice is not obtained, companies can find themselves entering into transactions which can be reversed in the future, or which expose directors to sanction for noncompliance with their statutory duties.
3. Protect your position
When supplying or purchasing services and goods, companies need to protect themselves from the potential insolvency of their customer or supplier.For sales, this can be done by limiting exposure to certain types of customer (eg contractors), invoicing and collecting debt promptly and seeking retention of title on goods. When purchasing, paying the minimum deposit and collecting goods promptly will help to protect against loss if the supplier goes into liquidation/administration.
4. Mitigate risk
Practical steps that can reduce risk include making sure that there is room for negotiation in contracts. Avoid fixed-price contracts to protect your company from exposure to rising input costs or timing changes due to issues with procurement. If you purchase goods or provide services outside of Northern Ireland (including in the Euro zone), consider implementing an exchange risk management mechanism. Limit exposure to companies where you are an unsecured creditor. Finally, consider agreeing a settlement if you have a customer in financial difficulty.
5. Adhere to good business practices
Anticipate developments that could impact your business and work out a strategy to deal with them. This could involve forming group structures to protect elements of the business, regularly invoicing between group companies, managing profit extraction from subsidiaries, and managing salary dividend extraction for directors. Good financial record keeping strengthens business performance and decision making. Record key decisions taken at board level explaining the rationale and support with relevant financial or other information. The supports put in place to help businesses survive and protect jobs during the pandemic resulted in lower rates of business failure than would otherwise have occurred. However, with the supports now coming to an end and multiple challenges facing the construction sector, not least rising input and energy costs, it is likely that there will be a significant surge in businesses experiencing financial difficulty in the coming months. While inflation, cashflow problems and supply chain issues will undoubtedly force some businesses to restructure and/or postpone investment, others will find new opportunities to innovate and grow. Now is the time for construction companies to seek advice on their options and take the necessary steps to weather the current storm and build a sustainable future.
For further information, watch Mills Selig and FPM’s joint webinar: Recession Proofing Your Business on CEF NI’s YouTube channel.
