Everyone in the industry seems to be getting more cautious about who they work with.
In this year’s CN100, we saw that a lot of the sector’s heavy hitters have become more selective of the projects they bid on, preferring quality over quantity.
In the wake of Carillion’s collapse – as well as the others that have gone under since – we have witnessed companies attempt to clear debt or invest in bonds to put themselves in as strong a position as possible.
Another way companies try to protect themselves is by securing trade credit insurance, so that they are safe if a firm that owes them money goes bust, or if a project is blighted by delays.
In October last year, when the effects of Carillion were being felt across the industry, there was an estimated £150m total trade credit insurance payout.
Over the last year-and-a-half, many firms have put their faith in trade credit insurance to protect themselves against the volatile market.
This morning, specialist steel contractor Billington’s financial director Trevor Taylor told me that one of the ways the firm has survived the current market is by ensuring a minimum of 90 per cent of work streams are credit-insured “as a matter of policy”.
The firm saw its turnover and profit rise in the year to 30 June 2019.
Credit insurance is a way to protect against the worst that could happen – protection for a rainy day.
But why, when it threatens to rain, do some insurance companies seem to pull away their support?
Before Forrest collapsed, while the company was refinancing, subcontractor Proline discovered that insurers had pulled Forrest’s credit insurance cover.
Just months later, the subcontractor stopped receiving payments from the firm and was forced to down tools until what was owed was paid. Proline itself went under last December.
In June, when Kier announced it was to exit housing and property investment, the construction giant also said some of its suppliers had their trade credit insurance cut by providers.
At the time, Applied Value director Stephen Rawlinson warned that the issue could further “drain the cash out of the business because they have to pay people upfront to work”.
Last month CN explored how some local authorities had stepped in as bank credit became increasingly hard to obtain.
But the picture for trade credit insurance seems increasingly difficult too.
In its annual report for 2018, Laing O’Rourke said that “recent events in the UK construction sector has led to a reduction in facilities offered by the trade credit insurance market”, which it said could lead to further uncertainty in its cashflow.
Consultants at Mace also highlighted that “delays to projects were causing cashflow difficulties in supply chains and trade credit insurance availability” in the first quarter of the year.
It is difficult to pinpoint a viable alternative to credit insurance, but one option to insure supply chains on individual projects could be to use an Insurance Backed Alliancing (IBA) model, which would allow all firms on a project to have risk assurance, ensuring no risk is passed down the supply chain due to overspending or delays.
IBA is still being piloted on a handful of projects, but it could be the way forward.
Unfortunately, it feels like more construction companies may fall before change is felt.
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