2,000 firms could collapse with cashflow problems

Up to 1,000 construction companies could fail this year and a further 1,000 in 2004 unless they overhaul their approach to credit insurance and cashflow management, credit management firm Gerling NCM has warned. 

In 2002, according to BDO Stoy Hayward, 2,334 construction firms failed. Gerling NCM claims that almost a third went into receivership because of cashflow problems or the impact of a major bad debt.

Tony Garner, Gerling NCM's trade sector development manager, said all parts of the construction industry are vulnerable. "The industrial and commercial building sector is either stagnant or oversupplied. Construction companies operating in this space are focusing on winning jobs - almost at any price. As a result their margins are incredibly tight, leaving no financial headroom if a customer fails."

He believes major PFI players are just as much at risk too. "Construction companies that secure PFI-based business may be massively overstretched and over-borrowed. Their cashflow will be more tied up than ever. But because they feel cushioned, having big government underwritten contracts on their books, we fear many will relax their cashflow procedures for all customers - even the higher risk ones. The normal checks will get short-circuited. This will create the perfect breeding ground for bad debts."

Gerling NCM has developed a credit insurance policy exclusively for the construction industry. The policy covers not only unpaid invoices, but also interim applications for payment that require surveyor approval before payment is made. Losses relating to retention payments up to 10% of the contract value are covered. The policy also covers expenses incurred for work in progress, and provides binding contract cover for contractors committed to staying on site.