It’s easy to become complacent during the good times. There’s no doubt that the construction industry has reaped many benefits from the past 15 years of economic growth, but the good times are at an end – for the time being at least. Having just emerged from a record breaking run of 63 successive quarters of growth since 1992, it’s also easy to panic when things aren’t going so well - and 2008 proved a shock to even the most pessimistic business operator. The new, more severe construction business environment that we are now operating within will quickly highlight companies which have become lulled into a false sense of economic security and have allowed management practice and attention to detail to lapse.
Adapting to the climate
You might think that operating in a changed economic environment means making sweeping changes to the way that you do things – but in many cases you would be wrong. Britain’s economy has, and always will be, cyclical; the only uncertainty being the length and depth of the peaks and troughs of a cycle. This means that the best way to grow and thrive in any environment is to adopt best practice techniques - regardless of the prevailing economic climate. So, whilst you may be able to get away with lax management during a time of economic growth, poor management systems will soon have dire consequences in these less prosperous times.
Get it in writing
There’s no denying that the current economic downturn presents a greater degree of risk and threat to your company’s profitability, so your main goal must be to manage and minimise the risk factor. As a business allied to the building industry, the very first priority is putting a clear and coherent contract in place. This may sound obvious, but it is shockingly common, even amongst companies responsible for delivering multi-million pound projects, that managers are unaware of precisely what their company has actually contracted for in terms of timing, payment periods, rights of set-off, insurances, damages and even the mechanism for valuing change.
It’s also a common misconception that, just because one party hasn’t signed the contract, then it is not bound by its terms. In fact, regardless of whether those terms have been expressly agreed by the other party, the general rule is that it will be binding. Therefore, it is crucial to ensure that the main terms and conditions of contract are expressly agreed and clearly understood, the terms are acceptable and that the documents referred to are in fact those that the agreed price was based on. Ideally, you should use an industry standard form of contract in preference to a bespoke form; these are not only industry tested, but also make it much easier to be alerted to onerous changes such as contractual set-off and ‘time is of the essence’ clauses.
Money in the bank
Smaller businesses are particularly vulnerable to problems with cash flow – and this becomes ever more acute as the recession deepens and the circumference of the vicious circle of cash flow and credit widens. Be alert to this threat and take measures to guard against tardy creditors.
- Ensure quicker payment by offering attractive incentives such as discounts for early settlement.
- Always run a credit check on the client before entering into a contract. If the client is a regular customer, carry out periodic credit checks and never trade above the credit limit that you feel is appropriate.
- Consider introducing special terms in the contract such as retention of title (commonly referred to in legal circles as the Romalpa clause), and interest on late payment.
Whilst a substantial turnover may look great on paper, it is the reality of a cheque in the bank which is the true marker of success. The old City of London adage of “Turnover is vanity, profit is sanity, but cash flow is king” is still relevant today, and with good reason. No matter how attractive a potential contract looks in regards to turnover or profit, it is the payment terms which are the critical factor in the company’s trading position and financial solvency.
Dealing with debtors can be unpalatable, but in difficult times it pays to be tough but fair. A contract with clear payment terms agreed prior to commencing a project ensures that all parties know what it is expected from the outset. If a client misses a payment deadline, chase it up immediately and keep chasing up. If a debtor is experiencing financial difficulties, you need to do all you can to secure your monies before it runs out. Where a debtor is experiencing severe financial problems, ‘tease’ out parts of the debt which will in turn reduce your exposure.
Where you are experiencing major problems in securing payment, before running off to your local solicitors, use self-help remedies such as the traditional ‘letter before action’ and statutory demands where the sum is not disputed.
Where the debtor disputes the sum claimed, there is of course, the option of legal action, but court disputes can be long and expensive and there is no guarantee that your debtor will still be trading by the time of the hearing. Therefore, consider including in your terms other forms of dispute resolution like adjudication, the decision of which can be made binding.
Variety is the spice of life
There’s no doubt that those involved in all areas of the construction industry are in for a tough time, so wherever possible, aim for breadth and depth in your client portfolio. If you work almost exclusively with one client or within one specific sector, you are making yourself very vulnerable, so don’t put all of your eggs in one basket. If you can, spread trading across many clients in different industries, to maintain your independence and reduce risk.
Necessity is often the mother of invention: just because you have always done something a specific way or worked within a particular marketplace doesn’t mean that is the way that it always has to be. Take advantage of lean times to diversify: think out of the box and find other markets for your product or service. For example, perhaps your product can be used overseas? Never rest on your laurels, irrespective of whether you are experiencing times of prosperity or economic hardship.
Spread the word
In times of recession, many organisations understandably look to make savings, but their choices are sometimes illogical. By all means review the policy of company expenditure and cut down on those expensive lunches, but choose your cutbacks carefully. Marketing budgets are often the first victims of a downturn, however, now is not the time to slash your marketing budget, but to ensure that it is being spent wisely. If potential customers don’t know about you, or you are failing to communicate effectively with existing and future clients, then you will struggle to survive. Now is the ideal time to re-evaluate your unique selling point and tell the industry. Remember that all of your staff are potential salespeople - and that they may need to be reminded of the fact.
If you have stayed competitive and implemented good sound business practice throughout times of prosperity, you will find yourself ahead of many of your less far sighted competitors. Review and build on what has worked for you so far – and change what hasn’t. The current cycle of economic gloom won’t last forever – so take steps to ensure that once the tide turns, your company is still buoyant, and possibly stronger than before, as not all of your current competitors will have survived intact.
Michael P. Gerard
About the author
Michael Gerard is a barrister, chartered builder, registered adjudicator and accredited expert in quantum and planning matters. He is also the managing director of Michael Gerard & Co www.michael-gerard.co.uk, a company of chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.