The construction industry in 2019 – cash will be king

2018 has been a memorable one for construction, mostly for the wrong reasons, says Ian Anfield, managing director at Hudson Contract.

The industry can look back on 2018 with some embarrassment about; how the house builders failed to hit government targets whilst paying their execs tens of millions of pounds in salaries, shares and bonuses; the fallout from the collapse of Carillion; Crossrail being derailed by delays and cost overruns; and Tottenham Hotspur playing an entire season away from home because their stadium builders failed to deliver on time.

But, most worrying and shameful of all has been the lack of response to the Grenfell fire. 2018 should have been a year of recladding flats, hospitals and schools to bring back confidence in our beleaguered industry, yet nobody is willing to pick up the tab. Where was our so called ‘construction leadership council’, or the trade bodies such as Build UK who like to claim credit for speaking for and leading our industry, but always seem to go missing when they are needed?

2018 has shown us that the UK’s construction industry is unable to act together as one. It is founded on sand, a handful of major contractors mopping up the majority of publically funded projects. These major contractors seldom deliver those projects on time or on budget. They lurch from profit warning to record growth, carry huge debt piles and strangle the cash-flow of any supplier brave enough to work for them. 2018 has been a year of debate about these issues, 2019 has to be a year of action.

2019 should be a year in which the large house builders and major contractors are held to even closer scrutiny by their shareholders, the government and the public. Carillion has shown us that we can’t rely on accountants and auditors, these companies are masters of PR and their books are so complex that they can tell any tale they like. Kier, Interserve and more like them are probably no more solvent than Carillion was, yet they battle on. 2019 will see yet more selling of assets and subsidiaries, company mergers, restructuring, refinancing and endless management reshuffles at the top of the industry.

Local Government procurement practices has to be challenged in 2019. Large long term frameworks agreements do not add value, they slam the door to small local firms, drive up costs and diminish the levels of service. Like PFIs, lumping small works into large frameworks has to come to an end. There is a local builder within spitting distance of every pothole, leaky council house roof or collapsed park wall in this country, in 2019 we have to start using them.

In contrast, there is a growing number of large so called ‘tier 2s’ who are far more agile, have leaner management structures, greater accountability and ability to deliver than the major tier 1 contractors. The tier 2s act as main contractors for selected clients and carry out their own developments when the opportunity arises, as well as servicing the major contractors when it suits. If the industry wants leadership, this is where it should be looking, but these guys are too busy earning money to sit on committees.

When it comes to skills and the much-reported skills crisis, all the talk will be of Brexit.  However, pre Brexit demand for skills has risen steadily since 2007. Skilled freelance tradesmen in 2018 picked up an average weekly payment of £900. Unless there is a tightening of consumer credit, this will continue to rise through 2019. Personally, I do not see why tradesmen being paid £1,000 per week should be controversial, if the CEO of a house builder is worth £75M, surely the bricklayers, joiners and plasterers who actually deliver the product have to be worth £50,000 each.

The CITB is planning to follow up its £1M investment in its ‘Go Construct’ website with a further £10m of hard-earned levy payer’s money – starting with PR and marketing in 2019. The aim is to compete with other industries for our brightest school leavers. The irony is, that apart from taking money from building firms and handing it to tech and marketing firms, the website is likely to achieve nothing. Tradesmen earning £1,000 per week will have far more impact and will create a much-needed draw.

During 2018 we have heard a great deal of debate and seen significant investment in offsite construction. This has translated into a small increase in the use of offsite construction techniques in house building, and for the first-time clients stipulating that their architects and building contractors must use offsite or modular structures to deliver their high-rise projects. The end to end involvement of the client is the only way that these projects can succeed and the use of offsite methods increase. Offsite is not new, far from it, but it is financially risky. Offsite requires large premises, and carries high research and development costs, transport costs and material and labour costs. The traditional clients of offsite manufacturers tend to be large contractors who are notoriously bad payers. Many extremely innovative and creative offsite manufacturers have been driven out of business due to problems with cash flow. Even now barely a month goes by without a significant construction supplier or precast yard closing its gates for good. Clients being better informed and better engaged with design and delivery, and managing the project finances could solve this problem.

However, construction is set for a huge shockwave in its finances in 2019, which could lead to many failed businesses. In October, HMRC plans to launch reverse charge VAT rules on all CIS transactions. This will mean that subcontractors will not collect VAT when dealing with construction industry clients, but will pay it out on invoices to material suppliers. Only small firms who deal with domestic clients outside CIS will be left unaffected. Everyone else needs new accounting methods and to be ready for the impact to their cash flow.

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