Subcontractors face mounting pressures as sites begin to reopen, posing a threat to financial viability, according to Jim Davis, managing director for construction finance at Bibby Financial Services
Subcontractors are entering the most challenging period of the Covid-19 outbreak says Jim Davis.
With cash reserves all but used up, the resumption of major construction projects will pose a significant threat to the financial viability of many subcontractors.
Davis said: “The next 4-6-weeks will be the most challenging time for subcontractors. Many businesses in the sector have already used up their working capital so, as contractors start to call their subcontractors back to work, the funds to pay for salaries and materials are simply not there.
“The temptation will be to go after as much work as possible as opportunities begin to open up but subcontractors must plan prudently. If the return to work isn’t managed carefully and gradually, we could see a wave of business failures.”
In a recent survey, BFS found that businesses in the construction sector were struggling most with the conditions imposed by Covid-19. 87% of the industry’s SMEs have had to adjust the way they operate, with over half (55%) temporarily shutting their operations. Additionally, 79% had seen a decline in their order books.
Nearly a quarter (22%) of SMEs in the construction sector are facing a delay in receiving payment and are running out of working capital – this is exacerbated by a rise in bad debt, with 36% of construction SMEs having to write off an average of £43,000 since the end of January. This is compared to the national average of just 25% of SMEs writing off £35,000.
However, Bibby Financial Services expects payment delays to get substantially worse for some SMEs as subcontractors work out how to manage contracts written before Covid-19 changed the way sites are run.
Communication is key
Davis, added: “As subcontractors get back to work, they are entering unchartered territory. New health and safety policies will need to be agreed and lines of responsibility for PPE drawn.
“Social distancing rules will significantly reduce productivity, making many contract timelines and deliverables unachievable. All of these issues will add to arguments and delays when it comes to paying invoices, delays that no subcontractor can afford right now.
“I cannot stress enough how important communication with main contractors and lenders is going to be as we enter this new stage. Talk to your contractors, let them know if there are going to be delays in receiving supplies or in completing projects, agree who is paying for PPE equipment before it is bought, discuss how to adapt timelines to keep your people safe.
“The construction SMEs who survive the next few weeks will be those which maintain the best communication with contractors. There is cause for optimism as we return to site, but we, as a sector, together, have to get this right.”