The cost of materials has shot up around the world following the COVID-19 pandemic – and has brought significant building cost increases with it.
A third of small building firms say that soaring material prices are significantly squeezing their margins, with more than one in 10 builders reportedly making losses on their building projects as a result.
It’s no surprise, then, that according to recent research, almost 100,000 small construction businesses are facing financial difficulty.
So, what’s going on? What is the outlook for the construction industry over the coming months and years? And what should you do if your construction business is struggling financially due to these building cost increases? Read on to find out…
What’s happening and why
Unfortunately, the hike in building costs is impacting everyone from builders to consumers.
Almost one quarter of construction businesses have been forced to pass these price increases on to their clients, making projects more expensive for consumers – and 85% of builders are concerned that these price increases could result in customers hiring rogue traders in an attempt to cut costs.
With price increases eating into already razor-thin margins, the result is a perfect storm when you factor in other issues such as increased wages, the end of the furlough scheme and the repayment of government loans that were taken out during the pandemic.
The impact of the pandemic
No UK sector was more badly affected by the pandemic than the construction industry. From the first lockdown until March 2021, more than 1,600 building companies closed down – which is shockingly more than the hospitality and retail sectors.
The construction industry has claimed almost £22bn across the government’s four main support schemes, with firms taking out government loans such as Coronavirus Business Interruption Loans, Bounce Back Loans and furlough grants.
In fact, data from the British Business Bank showed that construction companies have taken the largest proportion of Bounce Back Loans compared to other sectors at 17%.
The trouble with the construction industry
Of course, the impact of the pandemic and the rise in the cost of building materials are in addition to other problems frequently faced by the construction industry.With low margins and tough trading conditions even at the best of times, cash flow is an ongoing problem for many construction businesses, in addition to other difficulties that are unique to construction such as:
- slow CIS refunds from HMRC
- issues with subcontractors
- retention sums not released at agreed times
- quotes agreed at the beginning of a contract then not keeping up with rising costs
- difficult customers
What to do if your business is struggling
If you are one of the many UK construction businesses currently struggling financially, rest assured that there are options available to you, including but not limited to:
1. Set clear payment terms
The construction industry is notorious for the late payment of invoices, even before the pandemic. To try and prevent ongoing invoice issues and cash flow struggles further down the line, it’s important to set out clear payment terms with your clients from the very beginning.
Make it clear what your payment terms are from the start, including how much they will be required to pay and when.
Also introduce late payments fees if you haven’t already to encourage your clients to pay on time, and we’d recommend ensuring that your payment terms are signed and understood before you begin any work or before any products or materials are ordered, too.
2. Improve your invoicing
The quicker you invoice, the quicker you get paid – so make sure you’ve got an invoicing system in place that runs as smoothly as possible! Ensure you have the evidence to be paid, such as delivery notes and timesheets, as well as asking people to sign in and off site.
Send invoices as soon as work has been completed, and don’t be afraid to chase payments. The day after payment is due, remind your customer that they need to pay via email – and then chase them up by phone. If they are still dragging their feet, make sure you introduce the late payment fees discussed above!
3. Have a look at your cash flow
By carefully monitoring your cash flow, you can keep an eye on your company finances and hopefully prevent any shortfalls before it’s too late.
Start by creating a thorough cash flow forecast, estimating the amount of money you expect to flow in and out of your business and when, so you can be prepared for how much cash you will need in the coming months.
By planning ahead, you can take any necessary precautions before trouble arises to make sure there is a limit to the negative impact on your business.
4. Consider invoice financing
If you are still struggling with late payments despite taking the steps outlined above, a form of invoice financing could be the ideal solution for you.
Invoice financing essentially allows you to access an agreed portion of your unpaid invoices immediately.
Yes, the invoice factoring company will retain a portion of the funds as payment for their services, but the reassurance that this kind of arrangement can bring to your company in troubling times is more than worth it.
What’s more, knowing exactly when you will get paid and how much means you can plan more effectively when it comes to cash flow, purchasing materials and covering your outgoings. Discover more about invoice financing and other refinancing methods here.
5. Apply for a Recovery Loan
Although the majority of government support packages released during the pandemic have now been withdrawn, there are still some schemes in place to help with business recovery in the wake of the pandemic.
One example is the Recovery Loan Scheme which supports access to finance for businesses as they recover from the pandemic. The scheme is open to businesses of any size and originally offered up to £10 million per business, with the government guaranteeing 80% of the finance to the lender.
It is open until 30th June 2022, but it’s important to note a number of changes that will come into place from 1st January 2022.
Then, the scheme will only be open to small and medium sized enterprises, the maximum amount of finance will be capped at £2 million, and the governments’ guarantee coverage will be reduced to 70%. Find out more about the Recovery Loan Scheme and how to apply here.
6. Speak to an expert about a CVA
If you are still facing financial difficulty yet believe your business has a viable future, it could be worth exploring the option of a company voluntary arrangement.
A CVA is a powerful business turnaround tool that gives much needed time and space to companies so that they can trade out of debt.
It’s a contractual agreement between you and your creditors where the business will pay back what it can afford over an agreed period – and once that time period is up, the rest of the debt is written off.
There are a number of benefits to a CVA, so discover more about how the process works and if it’s right for you here.
How McAlister & Co can help
If your construction business is struggling and you need some help and advice on what to do next in order to cope with building cost increases, McAlister & Co are here to help.
We’ve got years of experience in business rescue and recovery, and our friendly team will be able to advise you on what to do next in order to turn your business around.
Don’t suffer in silence – reach out to us today and start taking back control.
