News Article

Sector Analysis

The Construction Sector is in trouble! How a dose of "overmanagement" can help

By CreditMan Friday, November 14, 2008

Authors: Adrian Doble and Susan Moor of Vantis

If you are exposed to the building and construction sector, you'd be right to be concerned. So what can you do to become more comfortable?

The UK construction sector is prone to accidents, although we have never seen any research done as to why. The reason is often put down to poor budgeting, but we don’t believe this. We see that there are more fundamental reasons at work.

Fear of Failure
In a downturn, construction companies are much more prone to "shocks" than most businesses. One key reason is the fear of failure. Despite a move to dispute resolution, the fundamental basis for assessing projects comes from the premise that “My surveyor is right and therefore yours’ is wrong”. Getting surveyors to reflect the true costs is difficult and project managers fool themselves into believing that they can make up the difference over the rest of the project…………

For this, we advocate a hands on interim manager with a specific brief. Put a solid manager in for 6 months to thoroughly analyse WIP and the "cost to complete” and thereafter work with management to ensure compliance. The cost to complete is the estimated cost from the month end valuation to the end of the project. The WIP valuation might be correct, but if the Cost to Complete (CTC) is understated, the final payment may never be received. The CTC is where surveyors may hide their mistakes or where project losses can accumulate. The shock only reveals itself at the end of a project.

Check the contracts for opportunities and threats. Start negotiating now on cost overruns. Surveyors will hide these deficiencies in the numbers if you are not careful, blaming extraneous factors when it is too late for you to recover your position.

Many commentators would say there is not much a contractor faced with major customers can do. Well we say: Blitz the retentions book. A fresh approach always works. Dead cash lurks in final accounts that people have emotionally given up on. And in bad times it gets neglected because management gets distracted, fire fighting elsewhere. Get a fresh face to negotiate discounts for cash if necessary. The new person won't have the emotional baggage that blocks up old negotiations.

Cost reduction
Reduce contract staff numbers. Often you can remove cost quickly by reducing contracted numbers that tend to build up in good times. These mostly fall outside of employment law and our experience is that, in a downturn, they will find things to do to avoid layoffs. Don’t be persuaded by arguments against. Most companies in turnaround invariably need fewer people to focus on fewer things.

Vantis Interim Management & Placement Services has a number of interim managers on our books who are available for work immediately. Vantis also operates a number of specialist industry groups to include a Construction Group which is made up of professionals who are able to demonstrate an informed understanding of your industry and provide you with solutions tailored to your individual circumstances.

We hope that this gives you an insight into the nature of our work. If you would like to know more or would like to discuss a specific case please contact Adrian Doble on +44 (0)7767 205680 or Susan Moor on +44 (0)7787 124626.