After trading through the uncertainty of 2020, Scotland's construction sector is not out of the woods yet.
Demand has returned, strongly driven by infrastructure spending and by demand for private housing. However, this surge in activity compared to the lows of 2020 have put pressure on supply chains across the UK and internationally. Key construction materials are in scarce supply and prices of items such as timber and cement are fluctuating (invariably rising) on a daily basis.
What does supply issues and rising prices mean for the construction sector?
It creates an environment of uncertainty. Developers and investors might just wait this period out and wait for the market to settle, but few will be in a position to do so after the events of the last 16 months. On top of this, some industry bodies are forecasting price rises over the medium term to at least 2025.
In the commercial construction market, this uncertainty comes on top of questions around the future demand for office and retail space, as we wait and see how much of the workforce returns to the office. The story is similar in the labour market with companies struggling to fill positions.
The long-term impacts of project delays
The knock-on impact of projects being held up to due to materials bottlenecking construction is still to work its way through the construction sector.
For construction companies, the uncertainty has multiple impacts on trading including the ability to accurately price and tender for work, and on working capital management.
This will create working capital pressure, and companies need to keep a close eye on working capital as they attempt to ramp up operations to meet this new demand. This applies across the sector but is especially relevant for housebuilders, or smaller contractors servicing large projects.
Overtrading (essentially mismanaging working capital during a period of growth) is the biggest risk facing these businesses, and we have already seen a few casualties in the Scottish market in recent months.
What can construction businesses do to stay in a strong position?
AAB’s construction & property sector team have outlined the most important things construction businesses should be considering at this time:
- Be in a position to produce timely and accurate cashflow information so you can react quickly to change
- Track working capital and review this to know if you have the cash required to complete a project
- Speak to customers openly to agree payment terms and milestones to avoid difficulties down the line
- Utilise the technology that is now available to create real time dashboards showing key metrics. This management information allows you to react quickly and take preventative action
- Always plan ahead and look to the future, considering all aspects of projects in the pipeline to make sure plans are achievable, allowing you to scale your businesses effectively
- Be aware of all funding options and working capital tools available to you and don’t be afraid to use these supports to help your business, whether it’s a short term bank loan or equity investments
- Don’t be tempted by quickly going for the cheapest finance offer, consider a solution that aligns most appropriately to the business needs and strategic direction.
Next Steps
As we have outlined above, in order for businesses to survive this period of uncertainty and come out of it in a strong position, the points we have shared can’t be ignored. The importance of preparing and maintaining reliable, up-to-date and comprehensive financial information can never be overstated.
However, managing this information can be another source of stress for business owners. A finance provider will help to gather and monitor this information, allowing you to focus on running your business. Taking professional advice at the right stage can open up a number of financing options for your business, and protect it in the short and long term.
If you would like more information about how AAB’s dedicated Construction & Property team can support your business, please contact Stuart Rose, Audit Director.
To find out more about AAB’s Construction & Property sector service, click here.
