Tips for Construction Companies — How to Survive

Things are tough right now for companies in the construction sector. They’ve been hit by a raft of challenges all at once. Factors like the rising cost of building supplies, a shortage of skilled labour, and adverse weather conditions have all put pressure on construction businesses, making it harder to turn a profit. We’ve also seen some big contraction companies fail, which has flow-on effects on sub-contractors and suppliers in the industry.

In such a difficult trading environment companies in the construction sector need to be especially vigilant and take steps to protect themselves. Here are a few high-level tips to help companies in the sector survive and thrive.

Monitor Solvency

Anytime a company faces difficult trading conditions there should be a focus on monitoring solvency.

Trading whilst insolvent comes with significant commercial and criminal implications for Directors in Australia, so it’s vital for them to know where their company’s financial position is on a regular basis.

Practically, this means more regularly updating the books and reviewing the company’s financial position. Often directors are busy with the day-to-day and will only look at their financial position on a quarterly or even annual basis. In times of crisis, you need to step up the frequency of these reviews to avoid inadvertently trading whilst insolvent.

Collect your Debtors

With more failures likely in the construction industry, it’s important to keep debtors days low and make sure that there aren’t debtors outstanding long past due dates. This means monitoring debtors and then quickly moving to active enforcement when they become overdue.

I have seen many instances where sub-contractors will run up significant debts with a single client, often going 90 or 120 days or more without payment while continuing to do work, exposing themselves to significant risk when that debtor fails.

Monitor Input Costs and Consider Unprofitable Contracts

As cost pressure grows companies need to be constantly monitoring input prices and re-costing existing projects. As costs rise existing contacts may flip from profitable to losing money. Directors need to know when this happens so you can make an informed choice about what to do with those contracts. In tight times, construction companies need to be focusing on their most profitable contracts while considering renegotiating or abandoning unprofitable ones.

Future Proof New Contracts

Avoid entering into fixed-price contracts going forward. I’ve already seen several companies stuck with fixed price contracts that are now very unprofitable.

Negotiate new contracts with floating cost mechanisms to allow for changes in input costs in the future and include clauses around weather delays to better share the risk between the contract parties.

Ask for Help

Don’t be afraid to ask for help. Lean on your trusted advisors like your accountant and solicitor, they are experts in their areas and can help you manage risk and get your company through the tough times.