What does a recession mean for main contractors?

A recession is a macroeconomic term that refers to a country’s severe economic decline.

In the US, the National Bureau of Economic Research defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income and employment…”. In the UK and Europe, we define a recession as a period of negative economic growth for two consecutive quarters.

In recent months, it has been reported that it is becoming more and more likely that a recession will hit the global economy, and more specifically, here in the UK economy. In June 2021, Goldman Sachs upgraded its forecast to say that a recession will occur from 15% to 30% in the next year. Bloomberg believes the economic situation may be much worse, forecasting in July that the risk of a UK recession in the next 12 months is now almost 50-50.

Clearly, in a post-covid, post-Brexit world and war rumbling on in Europe, there remains significant uncertainty in the global economy, but specifically here in the UK, the outlook is somewhat bleak. With that in mind, we need to consider the potential impact on our sector, construction.

We’ve already seen the turmoil of the last few years, its significant impact on construction materials, and how supply chain issues and inflation have negatively impacted that. But what happens in a recession? Bloomberg says we’re flipping a coin about whether one occurs or not, so perhaps we should prepare.

I wanted to look back at the most recent recession in 2008-2009, which occurred as a result of the global financial crisis.

So, what happened?

The 2008 recession, often referred to as the ‘Great Recession, started in the UK in early 2008 and was caused by rising energy prices (sound familiar?) and the housing market’s collapse. It lasted for over a year and was the longest-lasting recession since the second world war.

During a recession, construction is generally the first industry to be hit as companies stop investing in infrastructure and development. Construction activity in the UK fell by 17.1% between the first quarter of 2008 and the second quarter of 2009 – three times the drop of the overall economy in the same period.

By December 2008, the construction sector had shrunk faster than ever before. First house building suffered, but as the recession ‘bit’, civil engineering and commercial construction also fell at record rates. From the fourth quarter of 2009 until the same period in 2011, there was a short period of recovery, but this was not sustained, and construction fell into a recession again before a sustained recovery in 2012.

Clearly, in a recession, construction will be hit hard.

According to a survey by IFF Research, 54% of construction companies had seen decreases in revenue during the 12 months before October 2009. As revenue incomings come down, naturally, construction companies tightened their outgoings. At this point, redundancies bite. From a peak of 603,000 construction professionals in employment in 2008, this dropped by 10% during the recession.

Now, this all sounds very doomsday, and the ‘Great Recession’ of 2008 is referred to as ‘Great’ because it was such a significant economic catastrophe. Whether a recession today would be on the same scale as the one suffered over a decade ago seems unlikely, but my question is this:

Is planning for recession a terrible thing, or should we all be ‘panicking’ now to get ahead of the game?

Preparing for the downturn is likely good practice, as with a 50-50 chance, I wouldn’t say I like those odds too much. So, what can be done to protect your business during a recession or even just if you’re pre-empting one as we currently are?

First and foremost, cash is king. If you’re a contractor and are owed money, you must go hard at recovering it today. Retention has been an issue for us all for years, but if you are owed that money, go and push hard for it today, as tomorrow, during a recession, it will be ten times harder to collect.

Future forecast your workload. Many contractors in the past year have found work easy to come by. I believe this results from the pandemic backlog, a skills shortage fuelled by many things, not least Brexit, but it has left many feeling comfortable in the sea of work all around us.

But at C-Link, we have already started to see property investors and developers act more vigilantly in recent months, which means that future pipelines will be more sparse. If the economy hits a recession, project pipelines will tighten even further. Even if you are fully booked this year, you should consider 2023 and beyond.

Focus on lean construction. More and more tools are now available to ensure your team is working quicker, faster and more effectively. I recently spoke in our newsletter about how the research we did with our 20,000-strong community of construction professionals found that Quantity Surveyors spend almost 40 hours procuring a single subcontract package.

That is one whole week for a single person on one package!

If you are procuring 20 packages, that is 800 hours or the equivalent of 20 weeks for one person.! The numbers are crazy and show how inefficient we can be.

There are tools out there which can assist you in creating a leaner and meaner business.  That is one of the reasons why C-Link was founded.

C-Link is the future of subcontract procurement. Trust me. The software will create contracts, match you with vetted subcontractors and automate your procurement process. If you’re a main contractor and manage subcontractors, check out our tool to see how much time we can save you.

In short, my wholehearted belief is that a recession is now very likely. The wise thing for main contractors to do today is to balance their approach moving forward, not exposing themselves to lots of fixed costs and focusing on how to best secure work throughout 2023.

I am personally very risk-averse, so I believe those planning for a recession today will be very pleased they have done so should one hit in the year ahead.

Photo by Maxim Hopman on Unsplash

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.