Across the board the construction industry is booming. The common challenge for contractors and subcontractors alike is retaining and recruiting talent.
However the recent liquidation of Sammon Contracting brought into sharp focus the irony that despite a building boom, building contractors are going bust.
In fact at least 42 Irish construction companies have gone into liquidation since the start of this year and more have entered examinership (100 day Court protection against creditors), according to the Sunday Independent who saw email exchanges between construction industry insiders and insolvency experts.
As recently as 14 September RTE News reported fears for the future of Kildare based building contractor, MDY Construction after reports that subcontractors had not been paid for months.
The Sammon collapse could be described as unique because they were so heavily dependent on 'too big to fail' UK outsourcing specialist Carillion, who in turn were so dependent on public works. But therein lies the problem. Building contractors with a business model based on public works are especially vulnerable. MDY was involved in building state-funded social and affordable housing projects.
Public works sustained many contractors during the horrific construction blackout between 2010 and 2016, keeping noses above water. The problem now is that the tide of cost has risen higher than profit margins will allow.
In the last two years costs, driven by labour, materials, regulation and supply chain, have accelerated. Contractors have absorbed that cost, yet have continued to low ball public works tenders to win public contracts. Darwinism puts paid to that logic I hear you say.
A recent industry survey revealed profit margins averaging 1% to 1.5% across the Irish building trade, compared to an EU sector norm of 5%. A CIF spokesman described margins as now being "dangerously low".
You can say that again. No business model can sustain that paltry margin unless it has volume. To achieve volume, they have to scale and to scale, they need to win consistently large projects from the biggest building patronage, governments. Pretty much explains Carillion.
The State is such a significant employer to building contractors in Ireland, that they can rarely avoid tendering for these projects. That power allowed the State to present a 'take it or leave it' type of contract, stacked in favour of the State, obsessed with the lowest fixed price lump sum tender. Contractors face sustaining loss on two fronts: firstly the absorption of increased cost in their tender price, driving down their already microscopic margin and secondly forcing the contractor to weather additional costs associated when certain costly changes occur during the project.
The problem is that when one contractor goes bust, they could take four or five subcontractors down with them, who are in turn unable to stay afloat if the €100,000 owed to them is unpaid. Ironically the government commenced the Construction Contracts Act 2013 in July 2016 in the hope of improving cash flow down to subcontractors in the construction industry. What is the point in improving cash flow if contractors are teetering on insolvency. You can't get paid from an insolvent company no matter what new tools the Act gives to recover unpaid monies quickly. Truly with one hand they giveth, and the other they taketh.
CIF Director General Tom Parlon has described the inflexibility of government contracts as being a cause of this insolvency and that it would lead to more business failure in the industry. Expect a boom in Examinerships but don't expect any amendments to the Public Works Contracts any time soon.
Leman Solicitors represent Contractors and Subcontractors alike in contract negotiation, getting paid, disputes and Examinerships. For further details contact Larry Fenelon or Ronan McGoldrick (016393000)
The inflexibility of Government contracts in the face of substantial increases in input costs mean construction companies may now be forced out of business or to abandon ongoing public-sector projects. The Government contract forces all the risk and costs of unforeseeable issues onto the construction company,” said the letter. Companies were “locked into delivering projects at this price regardless of any cost increase in the intervening period” and "several construction companies currently involved in public sector contracts now face examinership or abandoning live public-sector projects,” he wrote. Meanwhile, a survey by one of Ireland’s biggest contractors revealed margins averaging 1-1.5% across the Irish industry compared to an EU sector norm of 5%. A CIF spokesman said the survey suggested margins were now “dangerously low”.