Managing the return to growth

Phil Westerman is head of real estate and construction at Buzzacott

Stabilising interest rates, falling inflation and a tentative 0.5 per cent increase in house prices over the past six months are signs that economic conditions are improving. This is leading to housebuilders releasing sites and restarting paused projects, providing great opportunities for increased workflow for construction businesses.

“We challenge management teams around their profitability metrics, the strength of their balance sheets and the way cashflow is managed”

Although the green shoots of recovery are very welcome, it is important to be aware of the commercial and financial challenges and risks that come with them.

One is job repricing. In late 2023, Vistry passed on a 10 per cent price cut to all its suppliers and subcontractors, then prioritised releasing projects to those who accepted the cut. Other housebuilders have similar ultimatums, requiring companies to renegotiate prices and value re-engineer jobs.

Another issue is labour capacity and the availability of plant and machinery – how quickly can they ramp up from nought to 100 per cent? Businesses who haven’t kept their plant purchasing programmes going will find themselves desperately seeking equipment. And if they have let go of staff, they’ll need to recruit quickly and may find labour scarcity and wage inflation.

There is also limited flexibility in materials prices, and global events can suddenly lead to higher prices and scarcity.

Becoming more agile

These obstacles demand greater agility from contractors and housebuilders. Imagine you’ve got a pipeline of £1m to develop over the next two years. The market takes a turn for the worse and now you only have £750,000. Or suddenly things start looking up and you have £1.5m. They will need to flex their business model to deal with either scenario.

To create a buffer to these challenges, management teams should consider longer-term planning. Plans should include the adaptability to manage the peaks and troughs of resource availability, and potential changes in the market.

Management should look at cashflow forecasting as well as budgeting, and model upside and downside sensitivities into these plans. Companies can keep a base level of staff that can be supplemented by subcontractors. Not having this breathing space could have grave consequences, as spreading themselves too thin and not delivering can severely tarnish a business’s reputation, as well as profitability.

Businesses with strong balance sheets and liquidity should aim to retain their workforce and continue their plant and machinery buying programmes, so when growth returns they can quickly and confidently deliver projects.

Timetables should be renegotiated and revised, and deadlines moved when necessary. Sensible businesses will recognise they cannot commit to 12 projects, for example, and it’s best to scale down to say 10 and negotiate the timetables of the remaining two, or even just walk away.

At Buzzacott, we challenge management teams around their profitability metrics, the strength of their balance sheets and the way cashflow is managed. When we look at a going concern, we consider whether a company has a robust and sensible set of forecasts, sustainable plans and a comprehensive resource base.

We have a statutory engagement to deliver as auditors, but we do this in a way that draws our clients’ attention to the potential challenges they may face and helps them understand where additional risks might arise. Uncertainty will always be part of the landscape. Learning to expect the unexpected, and assessing the risks far in advance, will help contractors and housebuilders insulate themselves from downside risks.

For more information email enquiries@buzzacott.co.uk