Brendan Sharkey of MHA MacIntyre Hudson
It is no secret that the construction sector is still struggling and will continue to do so for the next couple of years. However, the sector is expecting to grow by 3.8% in 2015, which means construction businesses should already be thinking about how they will manage that upturn, writes Brendan Sharkey.
It’s a well known fact that when a market picks up, the cost of materials rise due to increased demand. Those committed to fixed price contracts may suddenly find that their budget doesn’t match the sudden increase in price. Therefore, it could turn into a very difficult time for any projects that started in the recession.
To avoid projectual issues, you need to be smarter, plan ahead and prepare for all eventualities by doing the following:
- Tie down your supply line – ensure you know your suppliers well and that they won’t desert you if a better deal comes along
- Buy in early – early materials will be cheap
- Limit the number of long term contracts – get a balance of short- and long-term projects to make sure margins aren’t squeezed too quickly
- Plan in advance – this is particularly relevant to your workforce. As more jobs become available, you don’t want your workforce leaving you for bigger, better paid projects.
The good news is that as the market improves the volume of work is likely to pick up, and those who have survived the recession are likely to get offered more work. This in turn will mean that there will be a chance to increase your prices.
With an increase in the volume of work, there will be a higher demand for workers. But young people entering the job market are continuing to turn away from the sector as struggles with the economic crisis and therefore becomes a less attractive profession. This could ultimately result in a skills shortage. To combat this, companies should look to rebuild their apprentice schemes, which may have been put on hold. By having a strategy in place to find apprentices, you can become more valuable as an employer and as a business.
Strengthening your balance sheets is also vitally important to survival. Strengthening them during tough times is extremely difficult, but efforts should be made to leave as much capital in the business as possible. Even though you should plan for the good days, your shouldn’t look to take all your cash out when it comes in.
Business owners should look to take a living salary but leave bonuses in the business to secure more work in the long term. Corporation tax is low at the moment at 20- 23%, so it is worthwhile leaving your money in the business as you will be paying more if you take it out (at about 40-45% plus National Insurance).
Retention of profits in a company is potentially tax advantageous. Eventual sale or simple closure (members’ voluntary liquidation) should result in Entrepreneurs’ Relief and an effective relief of 10%.
Strengthening your balance sheets is also vitally important to survival. Strengthening them during tough times is extremely difficult, but efforts should be made to leave as much capital in the business as possible.
You should look to build a relationship with your bank. The banking and construction sectors currently don’t see eye to eye as banks are reluctant to lend to businesses that are deemed to be high risk. A conscious effort should be made to change this. Currently, contractors don’t like talking to banks about their business, but they should. Banks will be far more forthcoming with companies that are informative and let them know what’s going on. A conversation only once every quarter will suffice at an early stage. By letting the bank know how you are doing and how you are getting by, there is a higher chance of cooperation. Better dialogue is likely to find you a better solution and eventually a positive change in lending.
All of this is useful information, but it also highlights the importance of seeking expert advice. When planning for future projected growth it is essential you speak to your accountant early on. This is because they should be able to offer an alternative view of the sector as someone removed from the day-to-day business of the construction industry. However, it is essential you choose an expert that has the expertise and ability to help you identify key milestones. They should be able to help you take stock to identify better opportunities, as well as where to build in some protection for your company. This way you will have improved your chances of surviving difficult times and flourishing in an upturn.
It is essential that the leaders within your company recognise the need to manage the challenges that are affecting the industry and identify accountants with the relevant expertise to help them enforce the fundamental change.
Brendan Sharkey, partner, head of property and construction sector, MHA MacIntyre Hudson
