construction Accountants

Construction projects are high risk. They present enormous fiscal requirements and unusual logistical challenges for companies constructing new office buildings, plants or production facilities. Underestimating risk can lead to poor procurement strategy or the lack of skilled resources to actively manage the risk of project implementation may lead to poor decision-making.

Construction contractors are under constant pressure to improve margins, reduce costs and improve predictability. Developing long-term relationships with key strategic suppliers is a key part of delivering this strategy. This involves construction companies motivating their contractors to be pro-active, develop new approaches, solutions and work with them to reduce risk.

PPP projects are an important source of construction and investment income for many of the largest construction companies, however, they can also be high risk. There is a time-lag between bidding for a project and receiving earnings. Project over-runs are common and can present a significant risk.

Due to the ease of entry into the construction industry, there is a proliferation of small firms with little management expertise in the industry. In addition, the general lack of financial barriers to entry has created an industry where market forces are most ruthless. There are just too many contractors at unsustainable prices below the norm, in the industry. This leads to the tendering of projects by small contractors who are not capable of doing the job. They become insolvent when they cannot manage the job.

Nearly all companies that fail do so because of cash flow problems. Cash flow is more of a problem in the construction industry than in any other industries due to the fact that when tied to a fixed price contract, normal market forces are immobilized. It has been shown that cash flow problems are largely responsible for the high level of insolvency in the construction industry. Construction is a labour intensive industry. Whether the contractor has been paid or not, the wages of the worker must still be paid. Cash flow is the lifeblood of the industry. Too often, people concentrate on whether they are making a profit. However this profit is tied up in debtors, work in progress or retentions.

Successful contractors do well in cash control and management. They employed highly sophisticated techniques of cash flow forecasting and monitoring. A well managed contractor maintains detailed financial, cost and management accounts which allocate cost in as much details as possible to specific contracts and to individual elements within them. Unfortunately, many contractors in the industry fall short of this practice. Many contractors become insolvent due to the lack of proper accounts in their organizations. They fail to collect debts, especially retentions; thus allowing these to accumulate until their delays made them difficult to collect later. The adage of strategic cash flow is to “collect early and pay late”. However, late payment is a two-edged sword. It is serious problem and a contributory factor to the large number of insolvencies in the construction industry.

The majority of contractors in the industry are small firms with just a few employees. Small firms often fail because of the financial failure of another company which is further up in the supply chain. This is known as the “knock-on” effect.

The unique nature of the construction industry has caused a large number of insolvencies each year. Due to high bank lending adversity and the current economic climate, significant financial pressures are imposed on many companies in the construction industry. Companies with high levels of borrowing and an insufficient capital base are therefore forced into liquidation.