When recently reflecting about my formative years as a young engineer in the house building industry, I began to recall the comfort and satisfaction of being ahead of programme with multiple foundations poured and slabs being laid. Nearly 40 years have passed since first getting my boots dirty.
Never before has the construction sector faced such unpredictable challenges to hasten an unwelcome slowdown in project starts – as world and economic obstacles create a state of flux. Indeed, construction data company Glenigan has recently reported that there has been a 48% decline in project starts since last year.
Construction risk
Contractors and their customers have been hit by unprecedented levels of cost inflation. This has sent several previously viable businesses into administration or into some form of restructuring or it has weakened their financial robustness. These events have created two fronts of risk for RP’s which require addressing more thoroughly than previously, with the focus being on contractor security and the uncertainty of future cost variations – matters which V10 are resolving.
Performance bonds are not the only safeguard
To unlock projects for our clients we carefully assess the financial standing of the contracting entities we engage with. These are not normally Tier 1 operators who I am pleased to see in the press are championing SME’s to succeed and bolster their order books demonstrating a much needed togetherness which our industry calls for right now.
As performance bonds become more pricier and difficult to obtain by SME’s, we have reached out to RP’s to consider a mixture of initiatives involving part performance bond and part enhanced retention which has been received favourably. Clients do recognise they need to be flexible to get their projects moving whilst also considering the forecasted turnover of organisations on works secured. In most instances this work is with other RPs on a monthly valuation basis guaranteeing a steady and predictable cashflow throughput as security. This is easing the acceptance of contractors from RPs financial teams and long may this bigger picture thinking prevail. We have in-fact ourselves worked collaboratively with partners on a recent project to place a cash sum in escrow with the residual security being covered by a partial bond provided by the contractor.
These times demand such innovative solutions. We are glad to see other insolvency cover providers such as Advantage are now seen as viable alternative by our clients as the £5 million cash at bank criteria imposed by others is stifling to the SME world. As long as this open mindedness continues then we should see an active time ahead.
Fixing costs and fluctuating costs
We have been encouraged how contractors and RPs have tackled the ongoing problem of rising construction costs. For us we endeavour to bring our clients a fully bottomed out delivery figure for the works. To do so it is essential to brainstorm the residual risks and to commit to any outstanding assessments or design work needed to do so. Where this level of up-front information carries a high cost then we are encouraging stakeholders to respect the merits of investing in such and to collaboratively work to that end. There is much value in taking this stance. If a project is oven-ready then it allows the contractor to be able to commit to a pretty assured site start date within a given quarter with confidence.
We are also finding when good communications arise between contractors and their supply chain then some cost certainty can prevail and the importance of this is becoming key for contractors to fix their costs up-to, in some instances, 12 months, which clients are appreciative of. Beyond this point RPs and their EAs are being very pragmatic about fluctuation clauses being inserted in JCTs. If all sides contribute on the wording of such there is generally a mutually satisfactory outcome. It’s the way it has to be at present.
Collaboration
V10 has been working together with vendors, contractors, EAs and RPs who make up the stakeholders in our land sourced package deals. Our view from the trenches is to fight these challenges with sensibility and total open collaborative methods of working. We all want to side step a slow down so let’s get on the front foot and collectively kick-start and sustain the pouring of foundations throughout 2022/2023.
The views of: John Stainton. V10’s Pre-Construction & Sustainability Director
