Low margins risks more construction failures

Published:  15 December, 2010

BIRMINGHAM: Business advisers warn of further building business failures following the collapse of Connaught and Rok.

Bev Marsh, corporate recovery director at RSM Tenon said that there were signs that the construction sector could further suffer in 2011.

"What we are seeing in the construction sector is the result of a ripple effect right across the supply chain," she said.

"When a large business fails, the knock on effect can be devastating as it can filter right through the whole - it is not uncommon for failures of businesses four or five levels removed from a large failure to occur 12 months or more later."

Businesses, including many merchants, which supplied Rok and Connaught may well struggle to survive after their administration. "We have already seen 57 jobs lost at the Wolverhampton-based eco kitchen company Chamois Furnishings as it was owed more than £200 000 when Rok went into administration. This level of bad debt cannot be sustained very easily," Ms Marsh said.

She said: "Confidence in the construction sector is a very important factor: negative publicity can push suppliers to ask for quicker payment terms causing less working capital being available.

"Credit insurance is also an important factor for this sector as there are only three key players in the market and if they withdraw the credit percentage or limit it, the cash flow within the business can also be severely damaged.

"In my experience, the construction sector is currently operating on tiny, if not, negative margins. Some firms are taking on contracts with negative margins for cash flow to try and sit it out.

"Unfortunately, it could be a prolonged period of difficulty and some may struggle to survive."

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