Trade credit insurer Atradius warns that the UK’s construction industry will struggle from late payments this year and that non-payment could be at a significant level.
The new in-depth Construction Market Monitor report by Atradius reveals that while output in the sector has rebounded overall, construction is still affected by trailing effects of the recession.
During the downturn, construction companies tendered at margins that are no longer sustainable in the face of the raw material price increases and higher labour costs of 2014/15: the report outlines that with so many construction businesses still working on such low margin legacy contracts, losses remain relatively frequent despite improving forward order books.
Late payments continue to be an issue for the sector, especially from Tier 1 contractors who struggle themselves with legacy contracts issues. Atradius reports that non-payment notifications showed an upward trend in 2015 and incidents of non-payment are expected to continue in 2016. Meanwhile, construction insolvencies are expected to level off in 2016 after the increasing trend in 2015.
Simon Rockett, senior risk manager for Atradius, said: “Due to the upward trend in output since 2013/4, contractors are now able to be more selective in choosing which contracts to tender and therefore have more influence on payment terms. However, this is somewhat counteracted by increased costs for labour and materials which has a negative effect on margins. At the same time, access to bank finance remains difficult, particularly for smaller businesses and for those businesses having to weather unattractive terms.”
The report also highlights a potential negative impact upon those construction businesses dependant on the UK solar sector following changes to the Feed-In tariff. The Government’s proposal to reduce the tariff by more than 80% has subsequently been adjusted (to 63.5%). However, Atradius notes that insolvencies have already increased in this segment since the end of 2015.
Mr Rockett continued: “The speed of deterioration seen with some of the recently failed construction firms highlights the need for companies to be risk aware – both in terms of being alert for any warning signs of potential insolvency and ensuring adequate protection is in place. At Atradius we work closely with the sector and are able to advise customers of trading risks on a case-by-case basis. We obviously need to exercise caution where we are aware of adverse information, but there continue to be opportunities in the sector and we are keen to facilitate trade wherever possible.”
Globally, Atradius reports a return to economic normalcy becoming visible in the construction sector, albeit at varying degrees. Developed markets are set for a more positive near-term outlook as the fallout from the global financial crisis recedes. The construction recession in France, Italy, the Netherlands and Spain has started to bottom out, while the US and Germany already record persistent growth. However, the slowdown in China has triggered decreasing commodity demand and prices with a knock-on affect across countries such as Australia.
While the sharp decline in oil prices is hampering building activities in oil-producing countries like the United Arab Emirates and the energy-related construction segment in the US, it could help activity in other markets by relieving public budget burdens such as in India and by increasing disposable household incomes which raises consumer confidence.
For more information or for free country reports and business guides to exporting, visit www.atradius.co.uk