Construction business owners don’t have it easy. Even in markets where there is strong growth, firms must grapple with high competition, slim profit margins, chronic late payments and a high proportion of business failures.
Although construction sector performance is tied closely to a country’s economic health and varies widely from country to country, 2019 is predicted to bring insolvencies for most areas. According to a report published by trade credit insurer Atradius, in 2019 construction insolvencies are expected to increase in 10 of the 12 countries analyzed, including France, the United Kingdom, Australia, Denmark, the Netherlands, Italy, Spain, Singapore and Sweden.
In the remaining two countries—the United States and Germany—insolvency levels will likely remain stable. Italy has the stormiest outlook, with growth slowed by weak domestic demand, restrictive bank lending, a lack of financial resilience among smaller firms and increased political and economic uncertainty. Just last year, instances of nonpayment spiked, and several of the top Italian construction businesses went insolvent or faced liquidity crises.
This cloudy outlook should perhaps come as no surprise, given the high-profile construction bankruptcies we saw in 2018. Early in the year, Carillon, the second largest construction services firm in the United Kingdom, announced its compulsory liquidation, a necessary move following nonpayment from Middle Eastern customers.
The U.K. construction sector continues to feel the aftershocks of this, particularly suppliers and subcontractors with outstanding payments. In October, Welded Construction, an Ohio-based pipeline contractor, filed for bankruptcy after $25 million of invoices went unpaid from work completed on The Williams Cos.’ Atlantic Sunrise natural gas pipeline. These are just two examples of many.
Strong U.S. Economy, Strong U.S. Sector...For Now
In the U.S., the economy remains strong, which puts the U.S. construction sector in a positive position. Chapter 11 filings have dipped in recent years, and the sector benefits from accelerating job growth and decreasing unemployment. However, many economists are predicting an economic downturn within the next several years, which could have a severe impact on the industry at large.
Although conditions are favorable at the moment, 2019 is expected to see a slight slowdown in growth—a predicted 2.3 percent compared with the 3-percent growth experienced in 2018. Construction spending is also expected to continue growing, although again at a slower pace than in 2018 (6.5 percent increase compared to a predicted 4.8 percent). Atradius analysts further predict that insolvencies will level off, with smaller construction businesses hit harder than larger firms. Political uncertainty, rising interest rates and increases in input and labor costs are behind these projections.
The current challenges facing the U.S. construction sector include:
- Labor shortages—Hundreds of thousands of jobs are unfilled and the unemployment rate is very low. Finding skilled laborers is challenging and job mobility is high, forcing companies to amend their compensation and benefits packages to better attract workers.
- U.S.-China trade war uncertainty—The tariff hike from 10 to 25 percent on $200 billion in Chinese goods was originally scheduled to begin in January 2019, but has now been delayed and the next steps remain open ended.In anticipation of price increases from China, a number of customers of Atradius’ clients have already either shifted sourcing to other foreign trade partners, redirected aspects of production to domestic facilities or heavily built up inventory—all of these tactics also increase costs, putting firms at increased risk of liquidity issues.
- Tariffs—Current tariffs on several major construction imports such as metals and lumber increase costs, and for the most part construction firms are unable to pass these costs on to consumers. Ongoing tariffs on Canadian lumber in particular place a tax on American builders. With domestic production outpaced by growing demand, U.S. builders remain reliant among Canadian vendors.
- Advancing technology—Although technology is usually seen as a benefit, for construction companies, especially smaller firms, new technologies can place a strain on operational integration. The construction industry is notoriously slow at adding new tech, such as drones and 3D printers, but failure to do so risks their competitive advantage. Smaller companies with less cash at hand are especially vulnerable.
Although the construction sector tends to have a higher rate of insolvencies than other industries, companies can take steps to protect themselves, both from nonpayment from trading partners facing liquidity troubles and from internal financial errors.
Nonpayment is a risk construction firms should take seriously—both Carillon and Welded Construction found themselves facing bankruptcy because of nonpayment by customers or vendors. Business leaders should be aware of the signs that a trading partner is headed for trouble. One big sign is a sudden deterioration in payment trends. Trade credit insurance is a great tool to mitigate this risk. Maintaining adequate insurance is a fundamental precautionary measure that reduces a company’s exposure in the event of a downturn.
For protection from internal financial errors, firms need to maintain strict safety measures, carefully review their agreements with business partners and hire and retain competent staff to ensure projects are managed effectively. Projects need to be accurately priced and forecasted and properly executed. Finally, invoices must be managed well to ensure proper and timely payments and receipts.