Building Construction News - Industry Market Intelligence By Brian Green

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) September 22, 2009 -- Failures and trade credit pose tough challenges for specialists
by Brian Green
The latest figures from data expert Experian put the number of firms in construction and property collapsing each week at about 100. That is more than twice as many as were failing in the months before the credit crunch.
For building services companies that represents a severe extra risk of bad debt and non-payment as they have huge sums tied up in money owed by clients, which are in large part other contractors and property companies.

To get some handle on the scale of the risk eInsideTrack has generated some numbers from a survey of almost 6,500 construction firms, as designated by SIC code 45, using data provided by Corpfin, part of Experian.

The scale of the risk has been well illustrated recently with the collapse of East Anglia-based Haymills into administration and the suggestion that its trade contractors are set to receive nothing of what they are owed.

The last set of accounts for Haymills, which date back to March 2008, show it owed its trade creditors £38.6 million on a turnover of £181m. Given that the company was sliding into administration it is highly likely that the debt to trade creditors rose from there.

The first thing our survey shows is that on balance construction companies are cash positive as money flows down the supply chain from the client to the supplier. But more interestingly it clearly shows that on average the bigger a firm is the more it is likely to be cash positive in the balance between what it is owed and what it owes.

Roughly 60 per cent of firms with a turnover of more than £100m are cash positive on trade debt and trade credit. For firms turning over less than £1m the likelihood is just 30 per cent.

But it is not just size that determines who is up and who is down on holding cash as it passes down the supply chain.

A closer look at the specialist contracting sector shows that on balance these firms are helping to bankroll the system. The survey found the difference between the amount owed and that owing for specialist firms working on building installation and completion averages about 4 per cent over the past three years. And for firms more associated with building services the figure tend to be slightly worse than for specialists as a whole.

Government figures put the total turnover of firms in this sector at about £65 billion, of which more than £45bn is attributable to firms broadly speaking in the building services sector. That suggests building specialists are bankrolling the system to the tune of about £2.6bn.

Meanwhile, the money owed to specialist firms working on building installation and completion is roughly 14 per cent.

Breaking these figure down, the amount outstanding in trade related bills owed to building services firms comes to almost £6.5bn, out of a total of more than £9bn owed to specialist firms working on building installation and completion.

The figures for money owed to specialists do not appear to be worsening when looking at the data provided. But given the inevitability that there is some survivor bias in the figures, we can expect that it is the more prudent firms that are surviving and a higher proportion of the more indebted have fallen by the wayside.

What does come out in the survey is that the larger firms are being squeezed. They appear to be less able to hold on to cash as it passes through the supply chain, partly as a result of their clients paying slower. And there have been many reports of major contractors extending their payment terms, presumably to redress the balance.

What is clear from figures produced by Experian on how long it takes to get paid is the growing gap between the time it takes for small firms to pay their bill and the time it takes big firms.

Figures for June 2009 show that large property companies were taking 115 days to pay, large construction firms were taking 104 days to pay while small construction firms were paying up within 59 days, which was four days quicker than the all industry average.

This compares with June 2007, before the credit crunch when the industry average was 59 days between the invoice being sent and receipt of payment, for small construction firms it took on average 55 days, for large construction firms it took 84 days and for large property firms 90 days.

More information can be found online at http://www.einsidetrack.co.uk

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