Exposure to the contract cycle
All the contractors in the supply chain rely heavily on finance and are very sensitive to cash flow disruption. This is because they must pay for materials, labour, and sub-contractors well in advance of payment from their client (ultimate client or contractor). This requires accurate financial planning; a delicate balance that can easily be upset by late payments and fluctuating resource costs.
In addition to this, weakening and uncertainty in demand can be compounded by high finance and political U-turns that make projects unviable or lead to them being cancelled. Typically, contractors in the UK operate at thin profit margins with tight cash flow so they’re especially vulnerable to late payments, a common challenge for contractors in the UK. There have been repeat initiatives and legislation trying to tackle late payment, but it continues to be a problem.
Historically, financially distressed contractors will go to great lengths to keep the conveyor belt of cash moving and, in this economic environment, they must resist the temptation to ‘buy work.’ As tendering becomes increasingly competitive, some contractors may also feel obliged to agree to fixed price contracts, without securing fixed prices from their sub-contractors and suppliers.
However, where contracts do not have an inflation adjustment clause, for example, applying the BCIS Price Adjustment Formulae Indices (PAFI), available in BCIS CapX , it means they have no legal facility to adjust contract sums. This leaves contractors in a particularly vulnerable position if they’re asked to bear the brunt of the rise in labour, materials and subcontractor prices. If the contract extends over a substantial period, any hope of a profit margin could easily be wiped out.
Large and tier-one contractors are also at risk on fixed price contracts, although there has been a move towards more collaborative approaches, to try to avoid the damaging impact of subcontractor and supplier failure.
Subcontractors and suppliers remain squeezed by the impact of cost and labour headwinds, compounded by the slowdown in the housing market.