RiskUKApril2017

Fashioning The Building Blocks of
Construction Risk Management
agenda specifically designed to combat poor
payment practice and help SMEs continue to
operate. From my own point of view, it’s simply
unacceptable that large businesses are
withholding payment owed to smaller
companies. This initiative should help prevent
some of the 50,000 construction business
closures that occur every year.
Every business in
every sector that
tenders for work has
to weigh up the
potential risks versus
the potential rewards.
However, in the
construction industry,
it’s increasingly the
case that subcontractors,
otherwise
known as Tier 2 and
Tier 3 contractors, are
being expected to take
a larger chunk of the
risk for a lower slice of
the reward. This is due
to the significant
challenges they’re
facing, as Carl Ghinn
observes in detail
As a business, we work closely with
contractors of all shapes and sizes, both in
the construction and M&E sectors. There
are several issues that they must factor-in when
addressing the delicate calculation between
risk and reward, among them the payment risk,
the pricing risk, the product availability risk and
the skills shortage risk.
One of the biggest risks facing Tier 2 and Tier
3 sub-contractors is cashflow. In a survey run
by the Specialist Engineering Contractors’
Group, it was revealed that the country’s top
contractors were owed over £1 billion in unpaid
bills from organisations within the public
sector, with sub-contractors bearing the brunt
of this, being owed at least £800 million.
Commenting on this matter, Rob Driscoll (an
advisor to the Cabinet Office) explained: “In
businesses of any size, late payment stifles
both investment and innovation. Our latest
survey of the market shows that far too many
public sector bodies are still ignoring the legal
requirement to enable prompt payment along
the supply chain.”
As of this month, large companies will have
to publicly report twice a year on their payment
practices and performance. The move is part of
the Conservative Government’s transparency
‘The Pricing Risk’
Price fluctuation is one of the major risks in the
construction world. During the tender process,
contractors are understandably expected to
cost every element. However, this is often for
projects that sometimes may not start for at
least another six months.
If their tender is accepted they will be held to
this price regardless of any marketplace
changes. Yes, in some cases prices do go down,
but in many instances they go up, leaving the
contractor with a much-reduced margin or even
a loss. As highlighted previously, these
payments are not always received quickly,
resulting in a considerably stunted cashflow.
Other industries have different and arguably
better approaches, among them the operation
of a cost-plus model, which effectively protects
the contractor while at the same time
promoting transparency.
Rising costs are a great concern for many of
our customers. According to the Construction
Products Association’s (CPA) latest Construction
Trade Survey, there has been an 88% increase
in raw materials costs for civil engineering
contractors in recent times. Rebecca Larkin,
senior economist at the CPA, stated: “While
Government has a role to play in providing
certainty for projects, the industry will need to
find ways in which to navigate rising costs.”
Sadly, this is having an effect on morale in
the sector. Brian Berry, CEO of the Federation of
Master Builders, commented: “The optimism
that we saw emanating from many firms in the
construction sector during most of 2016 has
now diminished because of growing concerns
about rising costs.”
Last October, the price of steel increased by
8%. This was a huge problem for some of our
customers but, as we follow the markets
closely, we had decided to bulk-buy a large
number of products before this increase. With
the additional benefit of our 60-day credit
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