Contractor Squeeze

 

'Construction contractors need a harmonisation of stage payments in the supply chain to stave off a liquidity crisis'. 

One of the insights that we gain at Avellio working with clients both large and small in the construction industry is a clear understanding of how large development and infrastructure projects are financed.

What is apparent is that amongst the large construction behemoths with development projects values of a range between £200 million and several billion, is that the majority of the work and the commensurate risk is outsourced to their supply chain, that are characterised as small to medium sized businesses.

By financing these developments and infrastructure works ‘off balance sheet’ the burden of project risk involving hard assets, machinery, materials, fabrication and labour is transferred to the suppliers. 

With big contractors typically settling invoices anywhere between 2 and 4 months this poses a significant problem for small businesses relying on stage payments from clients to augment cash flow, forcing some contractors to seek invoice financing to meet their supplier agreements. 

What is also evident is the practice of large main contractors and developers holding back payments from the supply chain in order to improve their own cash flow, with these due payments held back under the guise of a bond to ensure third party contractor performance, continuous supply, and delivery. 

These established conventions for managing working capital and maintaining control of small to medium sized suppliers could be viewed as a major barrier to conducting a lasting symbiotic relationship between main contractors, developers and the supply chain. 

As a solution, many of our small and medium clients, defined as having a turnover below £50 million, are calling for a uniformity involving invoicing and payments, with standard 30 day terms deemed the accepted range. 

Naturally payment retention is a necessary measure for ensuring that suppliers deliver on their commitments, but some voices in the industry are calling for an ‘escrow’ measure to protect stage payments in the supply chain, with cash payments remitted through a single primary project bank account, ensuring a harmonisation of payments as and when they are agreed as mandated. 

With contractors and the supply chain mutually dependent on each other, there is just cause for new industry standards and norms being determined and agreed upon.

#construction #propertyfinance #supplychain