Innovative ways contractors can manage cash flow, reduce costs and win more work during a recession (pt 2)

PART 2 OF 4: HOW FREE ISSUING CAN HELP CONTRACTORS REDUCE CASHFLOW PRESSURE AND COSTS DURING A RECESSION

Before we get stuck in, let’s have a quick recap…

WHAT DOES THE FUTURE HOLD FOR CONSTRUCTION?

The truth is no one knows the future, but there is some guidance to help assist in commercial decision-making.

2022: Despite the uptick in insolvencies, 2022 saw construction output increase by 5.6% (compared to 2021). This rise was driven by new work (+3.8%) and repair and maintenance work (+8.5%).

2023: This year will be harder. The CPA (Construction Products Association) predicts that construction output will decrease by 4.7% this year.

Despite this slowdown, JP Morgan and others believe the wider UK economy will avoid recession but will still see slow/negative growth in the first two quarters of 2023.

2024: The CPA also predicts that construction output will recover by 0.6% in 2024.

WHAT’S THE PLAN?

The outlook doesn’t look great but it doesn’t look apocalyptic either.

The plan for most construction businesses will be to weather 2023 and make the necessary business adjustments to take advantage of the 2024 recovery.

WHAT CAN CONTRACTORS DO TO PROTECT THEIR BUSINESSES DURING THE DOWNTURN?

Despite the UK technically avoiding a recession, 2023 may still feel like one.

By all accounts, 2023 will be nothing like 2008 and will be further distinguished by the fact that goods, services and energy will remain expensive despite a decline in demand.

This means that traditional ‘belt-tightening’ and cost cutting won’t work.

At least not in isolation.

In this series of blogs, we’ll be looking at innovative ways that construction businesses can reduce cashflow bottlenecks, reduce cost and position themselves to grow faster than ever in 2024.

We’ve identified 3 areas/practices which can help contractors achieve this.

• Free Issuing
• Good Design Management
• Diversify + Win New Business

This blog is going to focus on free issuing.

WHAT IS FREE ISSUING?

‘Free issuing’ refers to building components or materials supplied by the client to the contractor to install.

HOW DOES FREE ISSUING HELP DURING A RECESSION?

There are several benefits to free issuing:

• It reduces pressure on the contractor’s cash flow.
• It focuses the client.
• It reduces procurement, programme and lead time risk for the contractor.
• It can create a new revenue opportunity.

1. It reduces pressure on the contractor’s cash flow: 

The more that a client free issues, the less the contract has to pay out between invoices.

On small projects, this won’t be very much but on larger projects, this can make a significant difference to a contractor’s cash flow.

The ideal scenario is for a normal supply and install contract to be signed, and later amended to allow for free issuing of elements. This arrangement reduces projected cashflow pressure, adds some flexibility, and provides the contractor with a ‘buffer’ for unexpected eventualities.

2. It focuses the client: 

Clients who consider free issuing tend to be more detail orientated and involved. This can be a distraction if they’re overbearing, but it has its advantages.

Free issuing forces the client to engage with their spec rather than blindly trusting their designer/ Architect. Proper engagement with a specification allows the contractor to have more pragmatic conversations about the build. If this is done early enough, the tone and relationship of the project becomes more about ‘what can be done’ rather than ‘what should have been done’.

3. It reduces procurement, programme and lead time risk for the contractor: 

In simple terms, a client that free issues elements takes contractual responsibility for lead times.

This is incredibly helpful for contractors.

Depending on the project, clients are less cashflow sensitive, and less familiar with lead times etc. This often results in them ordering at the beginning of the build. Much earlier than a contractor would.

The benefits of this are several; the contractor has one less thing to worry about, the contractor can focus on other lead-time risks and the client gets precisely what they want.

4. It can create a new revenue opportunity:

As established in point 3. Free-issuing clients tend to order their elements earlier than required. As a result, this often means that they will need to store their ’10 designer toilets’ somewhere.

Depending on the project and business size, the contractor could offer to receive and store these free-issued materials for a proportionately small sum. The contractor will likely already have leased space for surplus project materials so being able to reduce the cost of this by effectively subleasing to the client could be very beneficial.

HOW DOES FREE ISSUING WORK AT DIFFERENT PROJECT SCALES?

Small, Domestic £250,000 – £3M:

On smaller domestic projects, it may be wise to offer a small discount to the client if they free-issue most of the finishes.

If they accept, there’s a strong chance that they will order all the elements before the build even begins and store them on-site.

These kinds of projects tend to be very personal so giving the client the opportunity to get exactly what they want would be appreciated.

It also involves them in the process and prevents them from holding the contractor 100% responsible for their dream outcome.

Cashflow on smaller projects tends to be harder to manage because the construction businesses are small and can easily become constrained by unpaid/ late invoices.

Free issuing helps with this and removes a lot of back-office admin work.

Large Buildings £4M -£9M:

Free issuing can and does happen on much larger projects. Except it tends to be for FF&E (Furniture, Fixtures and Equipment) rather than finishes or structural materials.

Quite often this free issuing is a deferred decision, so the order occurs later in the programme. This tends to happen when the client isn’t sure about style, or budget.

The most effective way to encourage free issuing at this scale is to suggest it during the tender stage. Creating a ‘potential free issue’ schedule alongside a tender value that assumes some level of free issuing allows the client to quantify how much they could reduce the contract sum. This could be very attractive.

Clients at this scale are often well-capitalised. This means they can afford to free issue large amounts of FFE and they are motivated to reduce contract value because it reduces the size of their construction loans and interest payments.

Large Buildings, Multi-Phase Projects £10M+

The dynamics of extra-large projects are very similar to the previous scale. The main difference is duration.

Such long programmes can make free issuing very attractive.

First, very large programmes are subject to inflation.

The reader will know that UK inflation used to run at ~2% per year but recently hit 11.9% (the largest annual increase since the Goods and Services Tax was introduced in 2000). For contractors ordering FFE very early in the programme to avoid inflation doesn’t make sense and wouldn’t be signed off as completed works by the employer’s agent.

However, avoiding this inflation and reducing the contract sum would be attractive to a client.

It’s at this scale that charging for the storage of the free-issued goods makes commercial sense. The client will be receptive as long as the ‘sub-lease’ costs less than the projected inflation.

HOW IS C-LINK HELPING CONTRACTORS COPE WITH THE DOWNTURN?

C-Link is working with leading construction businesses to streamline their most resource-intensive, time-consuming activity, estimation and sub-contract tendering.

On average C-Link is saving main contractors up to 900-man-hours per project.

(300-man hours during competitive tender and 600-man hours during sub-contractor tendering and management.)

If you’d like to discuss how C-Link can help you do the same drop us a note here.

If you’re not ready but if you’re intrigued, why not check out our platform?

Photo by Towfiqu barbhuiya on Unsplash

About Martin Prince-Parrott

Martin is an ESG Real Estate Developer and former Award-Winning Architect. He’s spent the last decade designing and developing a billion-pounds worth of mixed-use institutional-scale real estate. He’s worked with and for market-leading companies such as Gensler, Microsoft, Barratt Homes, Legal & General and Barclays Bank.