CJ Construction Blog

Contract Journal reports this week about the strains felt by subcontractors in the wake of the collapse of a main contractor.

In this case, subcontractors working for failed Pierse Contracting and Pierse Contracting Southern are reeling because they were not paid for months and now stand no chance of recovering what they are owed.

No company names are mentioned to protect those involved on a particular job. But this case illustrates the misery heaped on subcontractors from bad debt.

This problem is dangerously commonplace and shows no signs of going away.

When bad debt strikes firms can topple like dominoes, undermining the foundations of front-line production in construction.

Action needs to be taken now to protect those further down the supply chain. After all main contractors are protected from company failure and bad delivery by a raft of measures ranging from performance bonds and collateral warranties to parent company guarantees and retentions.

So why is the rest of the supply chain less deserving of fail-safe mechanisms? In this current economic climate even the biggest companies fail with little warning. The rest of Europe has evolved systems to protect payment in construction, why is the UK alone as a country that leaves its subcontractors exposed?

This is not a lost cause. Help could be given quickly as fortuitously the proposed Construction Bill is passing through its last reading stages at the moment

Plans to table some useful subcontractor amendments by trade bodies, like the Specialist Engineering Contractors Group must be supported, not rejected.

Everybody has the right to some protection, not just those at the top of the supply chain.  Let's see some unity on this issue.

The Government used to talk confidently about building a better Britain. It was even fond of highlighting the pivotal role construction played delivering better health services, schools and transport infrastructure.

Just nine months ago construction was going to kick-start the economy through the worst of the economic crisis, helped by the Government's economic stimulus package.

Since then we have seen a jolting 9% fall in construction output in the first three months of the year, in fact the worst quarter on quarter drop since records began.

Currently, hundreds of valuable college projects are destined for the scrapheap because nobody knows how is much money the Learning and Skills Council has to spend.

Meanwhile house building continues to float aimlessly in the doldrums, with even social housing providers struggling to find finance for projects.

And now to add insult to injury, construction is bestowed with yet another new minister, the fourth in two years. The situation is simply a mess.

If there was ever a time to appoint a Chief Construction Officer to sort this out, it is now. But even that post looks to have been kicked into the long grass, although Whitehall says it is still considering feedback from the industry.

In the eyes of many in the construction industry, Labour looks like a lame duck Government.
It is high time the focus switched from mending the expenses system, a significant but small issue, back to fixing infrastructure, which remain a significant and big issue for the country.

There is much talk about cutting spending but very little reference made to high price of unemployment. This is an area where construction can help. After all, every construction worker kept off the dole delivers £30,000 in reduced benefits and tax gains. Now that is something that somebody in Government should be focusing on.

The current political turmoil presents contractors with Hobson's choice about who to back in the battle to run the country.

Should contractors support a floundering government as it lurches from crisis to crisis, or call for an early general election in the hope that it will bring relief and a better long term economic outlook?

The only answer is to play for more time. As tempting as it is to hope for swift change, the next general election is certain to usher in an era of painful spending cuts. This age of austerity will present serious problems for contractors and suppliers.

Whether the spending freeze sees big projects suddenly axed or entire programmes brought under lengthy review is academic, the outcome is the same - projects that gave the industry confidence to battle through the credit crunch will grind to a halt.

Some contractors even fear that the flow of work from big education and local authority frameworks, which offer flattering order books, will be shut off in one sharp twist of the wrist by the next Chancellor.

There are already signs of the hard times to come. News that 74 contractors are currently chasing a £3 million school job in Kent should be a warning to contractors, big and small.

Contractors can be forgiven for being seduced into seeing public sector work as the only hope of keeping afloat. After all the last six months saw private work simply dry up. But relying on public sector orders now looks like sleeping walking over the cliff.

2010 is going to be extremely testing for everybody and many expect one of the major contractors to fall victim to the big spending freeze.

This unpalatable truth is time is running out to review the strengths and future direction of many contracting businesses.

Rail, energy and utility projects look like safe havens, if still very competitive markets, even housing offers some limited possibilities. But the real prize will go to those spending time with potential private sector clients.

There may only be a few intent on pushing ahead with capital spending at the moment. The food industry, which cruised through the credit crunch, is building and expanding capacity, even a few developers like Helical Bar are calling on investors to build up cash reserves for new projects. 

The good news is confidence is gradually returning. And with every month that passes, the better the odds are for contractors finding work to help fill the black hole created by spending cuts. So pray for an election in May. 

Green technology and sustainability will be the big driver for construction in the next decade of the 21st Century.

Certainly there is a growing consensus of opinion that in the near future developers will have to parade their sustainability credentials and jump through hoops to win planning and financial backing.

And naturally contractors able to prove they can meet more stringent construction demands will win the big prizes when the recovery finally takes hold.

In a sense this is not particularly new thinking.

Perhaps a more pertinent question to ask: is how committed are we as an industry to creating a more sustainable built environment?  If it comes at a high upfront cost do clients really have an appetite among clients to pay for it?

The dilemma is partly exemplified by the 2012 Olympics. Targets to recycle 90% of all demolition arisings on the huge site looked ambitious to say the leased when first published. In fact the contractors and engineers rose to the challenge and managed to deliver a gold medal winning performance of 98% reuse.

Likewise the job to wash and clean millions of cu m of heavily contaminated earth should be up there on the podium of excellence for generations to benchmark against.

An outstanding performance all round, but what of the Olympic Delivery Authority's target to use 70 per cent recycled aggregates over primary aggregates.

This appears to be left behind in the starting blocks.

The background to this underlines some of the problems the industry faces. In fact supplier Aggregates Industries tempted the ODA into raising the target from 25 per cent, saying it could supply the sufficient quantities of recycled aggregates to deliver 70% use.

In practice this proved too ambitious for several reasons. One unforeseen complication was the delayed opening of Prescott Lock. This impacted badly on plans to ship aggregates by water.

More importantly contractors are understandably loath to use recycled aggregates because design risks magnify and ultimately the cost of concrete rises because more cement is required.

On paper reducing primary aggregate use to 30% looked an achievable target, in practice real cost implications and a performance concerns put it beyond reach.

The unfortunate outcome is that it appears the ODA and construction industry failed to hit a green target. In truth a lack of practical thought in the rush to deliver world-beating statistics created a problem that didn't need to exist in the first place.

There is only one failure in this story and that was not getting everybody from the supply chain around the table in the first place to agree an achievable but challenging target.

The green light for funding the £6.2bn M25 widening is the clearest signal yet that some normality is returning to the PFI/PPP market.

Coming hard on the heels of the £3.3bn Manchester waste project, there is now a sense that the banks have regained their appetites for lending.

In fact, ironically the massive scale of the M25 has itself been a drain on PFI expertise because it took so many banks and people to put the deal together.

There is a palpable sense that the hiatus is over, and everybody in construction can breathe a sigh of relief. Big PFI players like Balfour Beatty and Carillion say they are confident that several more big PFI schemes will reach financial close in coming months.

But things will not be the same again. Post credit crunch fewer banks seem willing to lend and those with the loan books to fill seem intent on eye-catching big projects, rather than small schemes with limited returns.

This is hard to fathom given PFI still represents a low risk investment. Afterall aren't banks are in the buisiness of lending. 

Unless the finance world makes a real effort to support private finance there is no doubt it will wither and with it an opportunity to deliver vital projects and sustainable earnings for investors. Already the banks' desire for higher returns over shorter periods looks like it will kill off housing PFI.

It would be disastrous if vital education, health and prison projects go the same way.

To avoid this and even stimulate PFI into delivering more, it is high time the life assurance and pensions world stepped in to play a more central role. These financial institutions take a longer view than the five-year returns sought by banks post credit crunch.

A few have already shown the way and plan to take over from the banks when they seek a return after five years. The new Treasury Infrastructure Finance Unit, launched in the Budget, must encouraged others to follow to get vital projects moving.

Late and disputed payment has reared its ugly head and is becoming the scourge of construction once again.

Delaying payment is a damaging habit that spreads like a virus through the supply chain, infecting every business it touches from the main contractors to subcontractors, through to trade contractors and suppliers.

The scale of the construction payment crisis is difficult to quantify because it varies from business to business and sector to sector.

But research among subcontractors reveals as many as 95% not being paid within 30 days of due date. This is a shocking figure for an industry so reliant on cashflow.

That is why Contract Journal has decided to campaign for everybody to honour their payment promises.

It is about time the government and clients were called to account because all payments start from the top. The government's 10 day payment pledge looks like empty rhetoric to an industry that sees no evidence of prompt payment on the ground.

This is not an attack on any particular sector of the industry. The aim is to avert a tug of war over cash that could pitch contractor against contractor with damaging consequences for all.

The time has come to support those that live up to their payment pledges and highlight those who fall short of their commitments.

CJ will champion this cause over the coming months for the sake of our industry.

Let us know about your payment problems on ConstructionSpace.

Just when it seemed safe to count on Crossrail actually being built alarm bells start ringing about the project hitting the buffers once again.

This time squabbling in Cabinet about whether to allow business leaders to vote on whether they want to meet their allocated funding commitment is re-awakening slumbering objectors.

Previously Chancellor Alistair Darling and London mayor Boris Johnson sensibly agreed that businesses in London would not be ballotted on whether they were in favour of shouldering £3.5bn of the project's costs.

Afterall, let's face it, who votes for higher taxes, and this is a project of national importance.

But the Department for Communities and Local Government is reported to be supporting calls for a vote on an additional levy on business rates.

At first sight this latest problem looks like minor political rumblings but the risk is they win wider support at a time when the mood is growing to slash spending, despite last year's fine words about a stimulus package for construction.

Of course there are worries about spiralling costs. And the Crossrail team should be congratulated for continuing to seek savings on the project as it moves forward to the first tunnel drives in 2010. Crossrail has jolted and juddered along like the London Underground rolling stock it is supposed to ease pressure on.

This latest row is another sorry example of the lack of political will that besets all major projects in this country and Gordon Brown must stamp out this daft dispute before it spreads. The fact is Crossrail is more important now than it has ever been.

The £15.9 billion project promises to create 14,000 much-needed construction jobs at its peak, draw in as many peripheral jobs and generate £36bn for wider the UK economy. It is absurd to think that after the pros, cons and funding has been debated to death, there can be any room for hesitation about getting on with the job.

The project delivery and management team are in place, demolition of major buildings in the bustling Tottenham Court Road area is starting within days, and piling rigs working on the cofferdam at Canary Wharf station further east are revving.

Crossrail is a beacon of hope at a desperate time for construction, it supports London's development as a world city and its role as the financial centre in Europe. When it completes in 2017, the British economy will be heading in a different direction and Crossrail will be a symbol of renewed financial confidence.

The Treasury's decision to re-ignite the debate on bogus self employment looks well-intentioned enough at first sight.

But, if the experience of the last sweeping review of workers' tax status is anything to go by, contractors can expect months of chaos that will cost everybody dearly at a time when all could do without the distraction.

Already HM Revenue and Customs has handed down a total of £180 million in fines, largely because construction firms and self employed workers are struggling to get to grips with the existing system.

While details about the Treasury's planned review remain sketchy, there are rumours it will see tax inspectors given more power to collect penalties and fresh assault on self employment.

The plain fact is a third CIS review in a decade is simply not needed. The existing system has its loopholes, but these can be remedied on a case by case basis rather than needing a huge review.

The Treasury's plan to consult the industry about stamping out what it calls "false" self employment looks nothing short of tinkering with CIS to collect more taxes.

For example, if total self employment was reduced by half, £700 million in additional employer National Insurance contributions would flow into Treasury coffers.

The Government has made much of its public spending commitments and support for construction. The truth is a misconceived review will look nothing short of giving with one hand and taking with the other.

It's going to be sometime before the industry will be able to unpick the latest Budget for real clues about what the future holds for construction. The £1bn housing stimulus package, including a £600 million injection to kick-start stalled housing projects of course is welcome.

The measure to provide a top-up scheme to ease the credit insurance guarantee crisis shows the Government has been listening but falls well short of what's needed.

Even taking into account the raft of energy efficiency measures announced by the Chancellor, like further grant for loft insulation and kick-starting mothballed wind farms, there is that sickening feeling that the industry once again was prescribed an aspirin to treat a migraine. 

This felt the case six months ago when the Government's unveiled its £3 billion stimulus  for construction . It was not enough and months down the road it is anybody's guess where the money has gone. Certianly very few project have materialised.

So what for construction?

A useful and interesting indicator for those trying to plan ahead is that politicians and economists seem to now feel they can talk freely about green shoots of recovery without attracting widespread derision.

The worst and by worst read the horrific freefall in banking and business confidence may be over.  

The serious problem for construction is the road to recovery will be a rocky one. There is much talk about whether the recovery graph will be U-, V- or W-shaped. Another letter in the lexicon of economic activity that should be concerning all contractors is the L-shape depicting future public spending.

Whoever wins the next general election, there can be no doubt that the Government will swing the hatchet, far harder and deeper into public spending than this Budget suggests, knocking flat anyone who has come to rely on roads, education, local authority or health work.

More worrying is that by 2010, when cuts take effect, public spending is forecast to account for more than 40% of all construction output, compared with just above 30% in 2007. So the effects of cuts will be magnified.

Now the troubling question is whether the private sector has enough confidence to fill the chasm left by public spending cuts.

At the moment the big clients still seem content to wait in the shadows. Hopefully the recent talk of brighter spots in the wider UK economy will coax a few big clients and developers into the light. But it will be a deep void to fill.

A long-overdue fall in construction fatalities looks on the cards. The HSE will not publish official figures for the year-ending March for several months, although monthly accident figures already indicate fatalities will be below the 72 recorded last year.

After several years of bitterly disappointing numbers, this is a real morale booster to those who have worked tirelessly to change attitudes and raise awareness.

Whether this is down to changes in safety regulations, higher fines, the slowdown or successful campaigns like the HSE's Shattered Lives initiative remains to be seen.

What is evident now is that construction, for so long embarrassed by its appalling record, has raised the bar at both senior management and site level. There is still much to do, but who, a decade ago, would have thought a contractor the size of Balfour Beatty would have the courage to set itself up a Zero Harm target for 2012.

Likewise, at the lower end of the spectrum, who would have thought scaffolders would set up a whistle-blowers line to police their own sector, alerting the HSE about rogue contractors?

The HSE should also get full marks for recruiting an extra 30 inspectors, albeit on two-year contracts. The industry needs greater enforcement now, if only to ensure the unscrupulous do not benefit from cutting corners in the recession.

After all, it is not the size of the fine, but knowing you will get caught that acts as the ultimate deterrent.