Considering credit worthiness

Considering credit worthiness

Our finance director, Neil Washington, addresses the issue of credit worthiness and specifically how contractors like ourselves can make sure we remain as attractive to clients as possible. His comments were originally published on the Construction News website.

Following the news that the turnover of the UK’s top 100 contractors is back above the £60bn mark for the first time in five years, many contractors could be forgiven for thinking the future is rosy. However, moving out of recession simply means the risks we now face have shifted, and the implications for clients of selecting the wrong contractor remains as strong as ever.

Recessions are extremely painful. Over supply, low barriers to entry and lack of demand mean firms are forced to be intensely price competitive. Turnover can often shrink and businesses are forced to reassess their operating structures. However, reduced turnover can have a silver lining – contracting business’ main investment is their work in progress, so despite turnover and margins potentially falling it is possible for a responsive contracting business to sustain cashflows as its work in progress requirement shrinks. This can provide some welcome relief for a contractor under pressure, but what happens when the economic cycle swings and can clients finally relax about credit worthiness?

The risk to contracting businesses as the economy recovers are two-fold. Firstly, contracts that have been fiercely competitive to secure have been locked into at prices at the bottom of the cycle. Even with an annual RPI increase these prices can begin to squeeze margins if the industry’s inflation rate runs ahead, particularly if they are long term commitments. Secondly, for the recession survivors a rebound in demand will translate to increasing turnover.

However, now the work in progress equation works in reverse; rising turnover requires more working capital to finance contract positions. Thus a perfectly profitable contractor may find themselves in a cash trap – more investment is required, yet margins remain stubbornly thin and the business fails to self-generate the funds required to support the rising turnover.

As the mantra goes - cash is king, and many profitable businesses have gone to the wall because they managed profits but failed to manage cash. It is therefore critical that as businesses get used to expanding again they have a healthy eye on forecasting and managing their cash requirements.

For these reasons, it is as important as ever that clients when selecting their contractor continue to review the credit worthiness of those businesses they invite to tender. In doing so, they should be looking for companies where the current assets more than cover the current liabilities, with a well-funded balance sheet that does not rely on third-party funding, and one which remains profitable despite the challenges the new economy presents.

How Eagle-eyed Contractors Can Help Landlords


Kevin Rhone, head of social value at Novus, explains why housing associations can glean new insights from contractors working in their communities and use them for more than completing building works. The social housing sector faces unending challenges. Not only are they tasked with regenerating communities, pressured to provide high quality homes and services, and challenged to increase their build rates, they’re also looked to as a key stakeholder in ensuring the safety and security of people in their communities. Having eyes and ears on the ground in these communities to make sure customers are safe and well is a bank-breaking investment, however. This is particularly true of national organisations borne of the spate of M&A activity in recent years. Monitoring communities more deeply than they’re obligated to do is almost impossible over their geographic footprints. Particularly since, for these organisations, huge amounts of capital have to be spent solely on maintaining stock. However, many RPs are missing an opportunity. They’re not using contractors’ insights, yet these businesses can offer a wealth of understanding about local communities. Construction and Maintenance Teams’ Positive Impact Of course, customer care officers can’t be everywhere at once. Construction and maintenance teams interact with housing associations’ customers every day. They see it all first hand and can be friendly faces on estates while also helping associations to identify solutions to regular issues. Many on-site professionals are keen to engage. They aren’t simply there to fix and repair homes, they build relationships with communities and in some cases, can be vulnerable people’s most frequent visitor while they’re around. They will regularly help elderly residents with their shopping and can be the first to discover if they’ve had an injury. Housing associations can also ask these teams to be vigilant for signs of violence and abuse and can ask them to keep their eyes open in areas where there are suspicions of drug use. While, yes, any responsible person would report illegal activity, contractors can help further by identifying trends too – how or why certain issues may be cropping up frequently. Using them in this way can help housing associations think up new ideas of how they might be better addressed. CSR Programmes It’s not just about pointing out the problems too. Many contractors have CSR programmes and housing associations could also use these to proactively address challenges in their communities. We run a national CSR programme called Changing Lives. So far, we’ve changed over 33,000 lives since 2015 through community projects that provide work opportunities or skills development or regenerate certain areas to help improve aspirations. One of our projects in the last year saw us work with a national housing association to provide temporary accommodation for homeless young families in Sheffield, for example. Advice for Landlords Landlords can do this by opening the channels of communication. Contractors and their on-site teams can provide regular updates or join team meetings to discuss issues on estates. They can also work in conjunction with customer care teams during their day-to-day work too, offering opinions, advice and useful context before officers contact residents. Contractors are a resource often under-used in this respect. However, landlords could not only get a better understanding of the real issues in their estates, but get the insight needed to help them solve them, by involving the people who are in their communities every day.