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Riding the troughs
Things are pretty buoyant in the construction industry. Small and large construction firms alike are enjoying a healthy workload as government spending on infrastructure continues apace. But construction is a typically boom and bust industry. How can companies ensure they are fit enough to ride the troughs as well as the peaks?
One of the most important stages in the construction process is tendering. Despite the buoyancy of the industry today, margins remain keen and many small firms, in particular, are having to quote aggressively to secure work. Forms must ensure they get their tenders right and that they are profitable. If possible, work should be secured on a negotiated basis. Any firm that takes on work for the sake of keeping its workforce occupied is putting its long-term survival at risk.
Once a contract has been secured, house-keeping is key. Documenting every change and variation is imperative. Too many people in the construction industry are still relying on verbal agreements. In construction, someone's word is not their bond. If a dispute arises that goes to adjudication, mediation or arbitration, it can be very difficult to win if there is no documentation to support it. Keeping accounting records up to date is also important. All costs associated with a contract must be put against a contract account.
Chasing payments is another priority. Collecting payment in the construction industry can be difficult but must be pursued. The same goes for retentions, with up to 5% being held back until remedial work is completed. It is all too easy for this work to get sidelined as new contracts come in but remedial work must be done and retentions must be collected.
In bad times, a company's risk exposure will increase. Many companies underestimate the damage that can arise from one bad contract. For small firms, in particular, one bad contract can bring down a whole business as the costs involved can often prove too much for a small outfit to bear.
The construction industry can be a very small world too. Builder's merchants, for example, will be only too aware if a firm is in trouble and well within their rights to stop supplies or impose harsh credit limits.
With fears of a recession being bandied about, now is a good time for construction firms of all sizes to look closely at their risk management processes and what they can do to secure their survival should the current peak become a trough.
"Moore Stephens Bulletin" Winter 2001
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