黑洞社区

It鈥檚 been a long time coming, but specialist contractors鈥� fortunes are definitely looking up. The latest state-of-the-trade report from umbrella body the National Specialist Contractors鈥� Council (NSCC) - of which more later - may contain some depressing findings, but it also includes clear indicators that business is improving.

For instance, the report, published earlier this month, states that 49% of NSCC members reported an increase in orders in the previous quarter, up from 27% six months earlier. Conversely, just 25% reported a decrease in orders, compared with 38% earlier in the year. The figures for enquiries are similarly optimistic and the balance between those seeing increases and decreases in orders is now the healthiest that the NSCC has seen since the end of 2004.

What鈥檚 more, 黑洞社区鈥檚 ranking of the most active specialists by discipline, produced in partnership with Barbour ABI, shows that firms are winning more work in most disciplines than at the same time last year (see tables overleaf).

鈥淚 think that we are now returning what we might call normality,鈥� says Brendan Kerr, chief executive at engineering specialist Keltbray. 鈥淥ur financial year came to an end at the end of October and we鈥檝e secured probably 50% of our workload for the year ahead. That compares with 30-35% in the last couple of years.鈥�

NSCC chief executive Suzannah Nichol adds: 鈥淧eople are still saying that it鈥檚 tough, margins are tight, but they鈥檙e busy and they can see a glimmer of hope. We鈥檙e not there yet, but people do feel a bit more positive.鈥�
However, a rising market presents dangers as well as opportunities, especially after such a long downturn. So just what challenges do specialist contractors face? And how should they and the wider industry respond to the recent changes in market conditions?

An expensive recovery

One of the most testing issues facing specialists is the well-documented rising cost of materials. Manufacturers have been as surprised as anyone by the growth seen in the last two quarters and have found it difficult to keep pace with demand, and this has inevitably led to price inflation. Clearly that鈥檚 an issue for clients commissioning new work, but for specialists working on fixed-price contracts it is particularly dangerous.

I think that the attitude of a lot of clients is that people should be grateful for getting the work. Material costs are causing a real problem

The problem is twofold. First, if companies are working on a contract that was entered into earlier in the year, when the recovery looked rather more anaemic, they still need to deliver at the price promised and consequently risk making a potentially substantial loss on the job. And second, new work will effectively require firms to take a punt on when prices will start to level off: assume that prices will stabilise and you risk bidding too low and getting locked into a loss-making contract; assume that they will continue to go up and you risk bidding at an uncompetitive rate and failing to win the work.

鈥淚ncreasing material costs are obviously going to add to risk,鈥� says Rudi Klein, chief executive of the Specialist Engineering Contractors鈥� Group. 鈥淚 don鈥檛 think that there is a great deal of sympathy for the problem. I think that the attitude of a lot of clients is that people should be grateful for getting the work. Material costs are causing a real problem.鈥�

Similarly, the cost of labour is starting to rise, which may be a very good thing for the workers concerned - wages have been flat for at least four years - but it does add to a company鈥檚 costs. 鈥淲e鈥檙e starting to see wage inflation coming into the picture,鈥� says David Frise, chief executive of the Association of Interior Specialists. 鈥淚nevitably you have to bring new people in to cope with the workload and that鈥檚 when you find that prices are rising. If you鈥檙e still working on a job that you got earlier in the year then that鈥檚 a problem.鈥�

New market, same old problems

Even as the market is returning, specialist contractors are still finding it more and more difficult to get paid on time, with all the associated cash flow problems that entails. The NSCC survey found that just 6% of respondents were being paid within 30 days. Meanwhile, 72% said they received payment within 30 to 60 days, down from 82% in the previous quarter, while 19% said they were paid between 60 and 90 days, up from 17% in the previous three months. 鈥淟ate payment has never been worse,鈥� says Nichol. 鈥淭here has been a switch. Everybody is embarrassed now about paying late - they know that it鈥檚 wrong - but that doesn鈥檛 stop them doing it. Main contractors鈥� business models are predicated on them paying late and they don鈥檛 know how to change.鈥�

I think that there is a general recognition that the market is on the up and that costs are following

According to Klein, this isn鈥檛 just a cash flow problem. Rather it is stifling growth by preventing specialists from taking on more staff, something that is clearly vital when workloads are rising. 鈥淥ne firm with a turnover of around 拢35m told me that they are owed 拢1m and said that if they could get what they are owed they could employ more people,鈥� he says. 鈥淎nd if they had more people they would be able to bid for more work. If you were to project that across the whole industry, you鈥檙e looking at 拢2-3bn that鈥檚 outstanding. The problem with payment is a cancer in the industry.鈥�

Dangerous times

And so an unholy trinity emerges. With growth returning, specialists are bidding for and winning more work. However, rising costs mean that fulfilling contracts is more expensive and long payment periods mean that the gap between money going out the door and coming back is extending. All of which combines to increase cash flow problems and consequently the risk of insolvency.

鈥淭he greatest risk of insolvency is right now,鈥� says Klein. 鈥淲hen all of a sudden firms are grasping opportunities that are presenting themselves, there is a danger that they overstretch. And they鈥檙e not in any position to ride out that process because after five years there is no fat there at all.鈥�

However, there are some signs that, as the industry emerges from the downturn, some clients and main contractors are reassessing their attitudes towards specialist contractors, and are starting to recognise that for specialists to continue as going concerns they do need to turn a profit. 鈥淭here seems to have been a realignment of thought,鈥� says Frise. 鈥淵ou鈥檙e seeing a much better vibe coming on payment. I鈥檓 not saying that it鈥檚 got better, but they鈥檙e talking a better talk. The view is that they need to cherish their specialists a bit more than they have done.鈥�

This changing attitude may well come from bitter experience. Sean Wickens, business development director at NG Bailey, says: 鈥淢aybe they鈥檝e had a M&E contractor on site one day and then they鈥檙e not there the
next. With a lot of our customers there is an understanding that we need to make a margin out of what we鈥檙e doing.鈥� Keltbray鈥檚 Kerr adds: 鈥淚 think that there is a general recognition that the market is on the up and that costs are following.鈥�

But while there are inherent dangers in a rising tide, it is still a welcome sight. And as development levels pick up, specialists that have weathered the recession and emerged on the other side should find themselves in a stronger position. Indeed, they may well be able to start getting pickier about the clients and main contractors they are willing to work with. 鈥淚 think that we鈥檒l see a flip to a seller鈥檚 market,鈥� says the NSCC鈥檚 Nichol. 鈥淚 thinkt that we鈥檙e on the cusp of that. What I hope is that the opportunity is taken and that we get a smarter construction industry as a result.鈥�