Greg Callan, partner, French Duncan chartered accountants
The latest industry survey reveals that confidence in the Scottish construction sector remains weak as building firms predict an ongoing decline in new orders and further job losses this year.
How construction firms choose to respond to this grim outlook will determine whether or not they will survive.
Many construction firms have been through the painful process of down-sizing, are currently trading at lower levels than several years ago, but remain waiting, increasingly impatiently, for market conditions to improve, at which point they will hopefully benefit from a marked upturn in the volume of work.
But the more enlightened firms are already adapting to the new economic reality by establishing a strategy for medium term growth based on the likely market conditions in the construction sector in the next three to five years and thinking about what steps they should be taking now and what segments of the market they should be focusing on.
Given that savage public sector cuts remain ongoing and the unanswered question of where development funding can be sourced in view of the banking sector’s continued reluctance to lend, it is vital that construction companies seek to grab the initiative and exercise some degree of control over the situation in which they find themselves rather than resign themselves to waiting out the downturn in hope of an upturn.
Whilst there are no shortage of challenges confronting the construction sector – whether funding, a depressed housing market, changes in planning rules, a reduction in public sector work or flooding – where there are challenges there are opportunities.
An opportunity for growth can perhaps be found in the exploration of potential for applying a more innovative approach to developments whilst others might reside in a company restructure, such as diversification through vertical integration or the application of a more robust and analytical approach to profitability.
Whatever the particular growth opportunity, going forward, construction companies will require to be leaner and apply a more strategic approach to their development because the world has changed over the last five years and they are no longer going to be able to fund new projects the way they were funded before the downturn.
Given that stark reality, do owner/managers throw their hands up in disgust and accuse the banks of not helping or do they accept the current economic parameters as the new norm and consider how best to secure project finance based on the world as it is today rather than what it was five years ago?
Where are their profits going to come from in the short to medium term? The answer to that question might well require a change in direction; perhaps by utilising their core skills base to embark on other, related activities.
Securing finance might well be difficult – but just because it is difficult does not mean that companies can ignore it and wait for banks to start lending again. Rather, they need to face up to the new economic climate within which we all find ourselves and confront it head on.
Owner /managers can take control of this uncertainty by adopting a strategic approach to the future of their business.
Often professional help in this process can be beneficial in providing a challenge to long held beliefs and defence of the status quo. Although it can be uncomfortable to be challenged, it can produce a more robust plan to go forward.
This should include a comprehensive review of their cost base, as part of that strategy, as well as a review of professional advisors to ensure they are fit for purpose.
Many owner/managers of construction firms still use the professional advisors they appointed when they were establishing their businesses decades ago and it is by no means certain that these same advisors will continue to possess the requisite set of skills and areas of expertise to fit the present requirements of the company.
This is a critical time for the construction sector and it is incumbent upon owner/managers to ensure that they have trust in the capability of their professional advisors to guide their progress rather than merely reporting on the past.
Despite all the well-documented challenges, a huge part of the Scottish economy is either directly related to the construction sector or is affected by it. The key to survival and growth for construction companies is to think about how to build a business based on where we are now rather than simply waiting for the upturn. Finding the right trusted advisor is the first step towards developing an effective strategy for growth.
Greg Callan is a Partner of French Duncan Chartered Accountants