Tier 1s should change their cashflow policies
Construction’s uneven share of profit and cashflow is unsustainable, says Mark Beard.
I had a wry smile when I read Galliford Try Construction chief executive Bill Hocking likening construction to an egg timer: clients at the top, a squeeze in the middle which is the Tier 1s, then the Tier 2s and 3s below making sensible money.
Hocking is spot on and the current position is not healthy. However, what also needs to be considered is the cashflow derived by Tier 1 contractors from building contracting. Most will be generating a positive cashflow at the expense of their supply chain.
This uneven share of profit and cashflow is unsustainable, leaving too many participants unable to fund appropriate levels of training, investment, research and development, plus contractors with balance sheets that have no resilience should a few projects go badly, or the market turn against them.
Tier 1s should look at what they bring to the party and how project cashflows are shared among participants. At Beard, we pay our supply chain promptly. Our average time to pay from receipt of invoice is 29 days.
We could dramatically increase our cash balances by pushing out payment times to 45 days or 60 days. This would give us a tremendous short-term boost, but it would not be very long before our supply chain nudged up their prices to reflect the financial pain we had inflicted upon them and our profit would tumble.
In fact, we have decided to do the opposite and gradually reduce the time we take to pay our suppliers.
Hocking argues that Tier 1s have to turn the egg timer into a test tube by making margins closer to the rest of the supply chain. Great idea, but project cashflows will also need to reflect the shape of a test tube, which won’t happen if Tier 1s continue to prolong payment periods.
As a medium-sized contractor, we are happy with 2% net margins and a small positive cashflow. While 3% with neutral cashflow would be better, and 4% with negative cashflow has its appeal, we would be a very different business, having very different discussions with our bank manager.
Mark Beard is chairman of Beard and president-elect of the CIOB