Slim profit margins, late payments made by public buyers and a higher proportion of business failures than in most other industries, seem to be reoccurring issues in the construction industry, regardless of performance.
Atradius, a global leader in risk management and credit insurance, has analysed the construction sector conditions in seven key markets:
Australia: Construction is a significant contributor to the Australian economy, accounting for approximately eight per cent of GDP. Nationwide residential construction decreased in the 2018 financial year and is expected to decline further due to over-capacity, tighter lending conditions, and slowing prices.
Despite solid performance in the non-residential segment, the weaker residential market is expected to lead to a 10 per cent decrease in total building activity by 2020. Nationwide payment delays and insolvencies are expected to increase further in 2019.
Belgium: Current demand is generally good in the Belgian construction sector. Despite significant competition, sales prices have increased, although not yet to pre-crisis levels. However, profit margins remain very low, except for some niche markets. This is also because, compared to neighbouring countries, the Belgian construction sector is highly fragmented, and consolidation is ongoing.
The number of non-payment notifications was high in 2018, with no major improvement expected in 2019. Construction insolvencies increased by more than two per cent in 2018, while for Belgian businesses as a whole, the trend was positive (down one per cent). In 2019, the construction insolvencies are expected to level off.
France: In 2018, production output slowed to 2.3 per cent as residential construction did not perform as well as 2017. The ongoing slowdown in residential construction is mainly due to a weaker economic environment and lower household purchasing power. Profit margins decreased in 2018 and are expected to deteriorate further in 2019.
While construction businesses face higher prices for commodities and energy as well as increased labour costs, they struggle to pass on those price increases due to fierce competition. Larger contractors keep putting pressure on their subcontractors.
Cash management remains a major issue for many, mainly smaller, construction businesses. Insolvencies decreased in the first half of 2018, but started to increase again in the second half of the year and business failures are expected to increase further in the first half of 2019.
Germany: In 2018, the German construction sector continued to perform solidly and the outlook for 2019 remains positive, driven by robust orders in the residential construction segment, and also in public construction.
While market competition has decreased somewhat, it remains high. Due to the benign demand situation and robust price increases, most construction businesses were able to improve their profits over the past few years, and the profit outlook for 2019 remains stable. With demand increasing and profit margins improving, payment delays and insolvencies have decreased in recent years, and are expected to remain stable in 2019. However, despite the more benign situation, the construction sector is still considered to be riskier than other industries, as the proportion of non-payment notifications and credit insurance claims is still higher than in other German trade sectors.
Italy: While early 2018 saw the expectation of a continued modest rebound of Italian construction performance, this has not materialised. In 2019, the sector faces one of the most challenging periods since the beginning of the economic crisis in 2008, with subdued demand and further deteriorating profit margins. Non-payment notifications were at a very high level in 2018.
Last year several of the top 50 Italian construction businesses went insolvent or faced a severe liquidity crisis. This was mainly due to devaluation of trade receivables and order backlog in some markets abroad (including Algeria and Venezuela), high financial leverage to finance the working capital requirements and capital expenditure, and slow payments from public clients.
The business failures of larger players have affected many subcontractors and suppliers of cement, concrete and steel. Therefore, the number of non-payment notifications and insolvencies are expected to increase sharply in 2019.
United Kingdom: 2019 is expected to be a difficult year for construction due to the lingering uncertainty over Brexit and the impact it could have on output, investment, and the current shortage of skilled workers. After increasing in 2018, the level of non-payment notifications is expected to increase further in the first half of 2019.
Construction insolvencies were high between January and September 2018, increasing by more than 16 per cent year-on-year in the third quarter of 2018 alone.
The insolvency outlook for 2019 is negative, with further increases expected due to the continuing economic uncertainty, persistent late payments, lack of supplier support, contract overruns, escalating costs, and retention payment issues.
If the coming months fail to provide more clarity about the conditions under which the United Kingdom will leave the European Union (EU), the commercial and infrastructure segments in particular could suffer from lower investments.
So far, there has been more evidence of project delays as opposed to cancellations, as investors wait to see the Brexit outcome. As more than 60 per cent of building materials are imported from the EU, any increase in tariffs or limits on quantities imported after leaving the EU could lead to higher costs for British construction businesses and result in a shortage of building materials.
Once finalised, it is likely that the current skills shortage will worsen, especially if there are no follow-up agreements with the EU on the free movement of people. This could result in higher pressures on wages, causing construction firms to face considerably higher project costs.
United States: In 2019, construction spending growth is expected to continue (up 4.8 per cent), although at a slower pace than in 2018 (up 6.5 per cent). Lower economic growth, workforce shortages, higher interest rates, and uncertainty over trade policies could have a dampening effect on output expansion.
Longer payments terms have increasingly become a method of attracting business from customers. Payment experience in the construction sector has been decent in 2018, and the overall number of payment delays and insolvencies is expected to level off in 2019.
The Australian construction sector is likely to face another difficult year in 2019 so it’s important for firms to shore up their customer base and tighten payment terms where possible.
It’s essential to chase late payments promptly and keep a close eye on customer behaviour and market conditions to identify any potential red flags early.
Construction firms without trade credit insurance should consider taking out a policy to protect themselves in the current uncertain marketplace, where on-time payments are likely to be far from the norm.
Trade credit insurance can potentially help construction firms gain access to finance in a climate where lenders are more cautious than usual. It can also help firms identify risky customers before doing business with them, avoiding the potential fallout of non-payment. Construction firms without this safety net may find it difficult to operate confidently in the coming months.
Mark Hoppe is managing director, Oceania, Atradius