The construction industry is challenged by a lack of shock absorbers when it comes to responding to disruption. Running on extremely low margins, unexpected delays or halts to a project can have serious, negative implications on cashflow. The delay to the development of HS2 is one example, unsettling the whole industry with a predicted fall in output by 1.7% this year and no growth until 2021 as a result.
Brexit and political uncertainty continue to interrupt construction projects across the country. Construction activity fell in September at the second fastest rate since April 2009, which has been attributed to Brexit, with experts speculating that the industry may well be back in recession. Rising material prices and a labour shortage are also largely fall-outs of Brexit.
New regulations are also set to further impact financial planning within construction. For example, the VAT domestic reverse charge for building and construction services will change how VAT is handled for some construction services in the UK. Applying to transactions between VAT-registered contractors and sub-contractors, the new regulation means that those supplying construction services to VAT-registered customers will no longer have to account for the VAT themselves. Instead, this will fall on the customer, which although wouldn’t incur increased costs, could create significant cash flow restrictions. This could have a serious impact for an industry that heavily relies on healthy cashflow and is already challenged by lengthy waiting periods for planning permission, supply chain logistics, and ever-changing project timelines.
But it isn’t just political uncertainty and new regulations that construction companies should be aware of, as extreme weather can quickly bring construction projects to a halt, whether that’s by preventing concrete from drying, or having to close sites due to high winds. It has been found that the average loss of labour efficiency from cold temperatures is around a staggering 50%. A construction giant took a huge £25m financial hit earlier this year whilst embarking on the Aberdeen bypass project due to various delays, including from unpredicted weather-related hold ups. This demonstrates how quickly costs can become out of control as a result of unexpected disruption to the project timeline, and low margins mean there is very little room for error on cost estimation. Consequently, the time it takes a business to forecast for, and respond to, these kinds of scenarios is vital in minimising financial loss, which can otherwise be devastating.
With so many factors to consider and the possibility for disruption to come from any direction, it’s vital that construction companies, no matter their size, have processes in place to cope with their constantly fluctuating environment.
The foundations currently in place
Cost/value reconciliation (CVR) is a critical process for the industry to monitor and measure project expenditures against the planned-for budgets and forecasts. It helps avoid costly expenditures on projects and earnings imbalances by minimising and controlling any ongoing overspending and allowing for more accurate management of future project pricing. However, many construction companies are still relying on legacy, manual processes and tools, meaning spreadsheets, emails and even whiteboards on site are often the foundation on which these plans and forecasts are built.
But when the actual costs that a company incurs rarely resemble those estimated in the beginning – due to the various disruptions mentioned above – such manual platforms don’t allow for the regular, accurate real-time adjustments and transparency that are required throughout the duration of a project in order to respond to unexpected events.
The necessity of long-term, connected planning
The unpredictable nature of disruption, whether that’s from political uncertainty or natural events, might seem like it renders any form of long-term planning redundant, but in fact it does the opposite. Market and environmental fluctuations necessitate long-term planning, especially in the construction industry, whether it’s low level management and forecasting of project costs in terms of materials and workforce, plot level forecasting or proper scenario modelling. But the key is being able to move fast and respond at speed when change does happen.
This is where connected planning becomes critical to profitability. Joining up planning activities across the entire project, from on-site project management and the supply chain, through to the finance team and third-party suppliers, allows the full impact of any form of disruption to be assessed holistically.
For example, when fluctuating house prices, political uncertainty or increasing entry costs to the housing market begin to negatively impact the number of housing sales, house builders have to be able to rapidly run scenarios to see where the project can be slowed down or where costs can be cut. This was recently demonstrated in St Ives, Cornwall, where a ban has been implemented on new builds being bought as second homes, which has significantly reduced the number of sales. As a result, house builders have moved to other areas where the housing market is more fluid. But having visibility across the entire project via a technology-based planning platform is key for responding to sudden changes in the market such as this.
When there are so many variables to consider, planning needs to be highly detailed, from material and staff requirements, to project timelines. By being able to access and collate all critical data sources across a project and its supply chain, businesses can reduce the impact of uncertainty and build realistic, actionable responses to all their potential ‘what ifs’.
Adam Bimson is Director and Co-founder of Vuealta