Medium term history
Although the Building and Construction industry has seen a prolonged period of growth since 2013 there has been significant variability within the sector. On the back of positive trends up to 2020, recent developments and concerns over both working restrictions / habits and the demand for houses / flats due to COVID-19, together with the overall economic outlook (both in the UK and internationally), is placing the sector under increased pressure and stress.
This current uncertainty on the back of traditionally low margins, with anticipated cost inflation, means that cash management remains a key concern.
Current outlook and challenges
Market conditions have become increasingly challenging as a result of COVID-19, in terms of new working requirements and project delays. In addition, construction businesses are still looking for clarity on Brexit, specifically in relation to the impact on European labour. Recent economic outlooks, with the potential for an extended recession through 2020/21 (and beyond) will impact on new projects and current developments in the private sector, with questions over whether there will be a sufficient public sector investment stimulus to balance out these losses. Within the sector the key considerations are:
- City centre construction projects are likely to be hardest hit:
- Reduced demand for offices, with more businesses embracing remote working; and
- Reduced demand for city centre flats, as there is less reason to be in a city for work, concerns over fire safety / ability to obtain mortgages due to cladding issues and people having an increased appreciation for ‘their own space’ following COVID-19.
- Public sector investment is expected to try and offset lost private sector spending and drive the sector over the next few years, as seen with HS2.
- Housebuilders continue to be quietly optimistic, despite the risk of a protracted recession, increased unemployment and changes to the Help to Buy scheme in 2021:
- With more land being released for development following government pressure on councils;
- Anticipated shift away from city centre living; and
- Low interest rates.
- Margins and chasing turnover to cover overhead costs, which has been a perennial issue in the sector, will increase as competition and cash pressure becomes more acute to meet increased levels of debt / liabilities from COVID-19 support measures.
- Availability and the cost of raw materials is a concern for many businesses as a result of COVID-19 and there is likely to be a shift away from international reliance for some products, with investment in domestic supply.
Stress and distress temperature rating
Building and Construction sector temperature assessment as at 1 June 2020, covering medium term history and outlook:
Key trends across the sector right now
- Mix of private to public sector projects (ability to meet tendering criteria)
- Low margins
- High overhead cost base
- Cost price inflation
- Skilled labour shortage (EU Labour)
- Availability of goods from international supply chains
- Revenue recognition and contract disputes
- Procurement / tendering process scrutiny and potential reforms
Case studies
Building Services
Underperformance in this building services Group and an exposure to the new-build housing sector led to a deterioration in performance and two profit warnings in the year.
KPMG's cash and working capital team worked with management and the wider business to uncover and implement a wide range of cash improvement opportunities that significantly improved facility headroom. This improvement, combined with a cash forecasting implementation (also delivered by KPMG), stabilised the business and demonstrated to lenders the business had sufficient control over liquidity and funding requirement.
Clugston Group Limited in administration
Operating from over 25 sites primarily across the North and Midlands, the business has companies involved in construction, civil engineering, logistics, property development and facilities management. The businesses suffered as a result of losses on a number of large and complex energy-from-waste contracts. KPMG were initially engaged to assist with a funding requirement by exploring sale options for the Group. Despite extensive and complex negotiations with key stakeholders to resolve issues caused by the losses, on this occasion it was not possible to achieve a solvent solution.
The Joint Administrators were able to realise value through sale of a solvent subsidiary, preserving 153 jobs. They have also been able to sell key assets, including freehold property and plant and machinery, as well as undertaking book debt recovery to maximise recovery for creditors.
Project Longbow
Established Tier 1 construction contracting business with turnover c£220m.
KPMG were initially engaged to support the company’s stakeholder management activities during a period of increased lender interest. At this time, we undertook a successful cash and working capital optimisation exercise, releasing cash to fund a strategic pivot towards higher-margin work whilst scaling down underperforming operations.
We later supported the business as it successfully sought new financing, allowing the business to fully execute on its long-term business strategy.
KPMG UK's national sector teams
Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.