An administrator’s view on builders going bust

Two contractors in the North East – Metnor and Tolent – were prominent names in the list of February administrations. Construction News asked Allan Kelly, a Newcastle-based partner in the restructuring team at FRP Advisory, about the challenges facing construction businesses in his region and beyond

“Where businesses once had some fat, a lot of that’s been absorbed over the last couple of years. So the wool’s pretty thin on the back, so to speak,” says Allan Kelly (pictured), the insolvency expert currently liquidating Metnor, a Newcastle-based contractor that turned over £80m in 2021 before collapsing last month.

Kelly draws a distinction between historical or deep-seated challenges facing construction companies – such as limited funding options and low margins that hit profit and cashflow – and the more recent economic effects of Covid and the Russia’s invasion of Ukraine.

Kelly says the collapse of Metnor and Tolent was an unfortunate coincidence but adds that the double blow created an undercurrent of worry among subcontractors in the North East.

“They didn’t really overlap a lot in terms of what they did so there doesn’t seem to be any subsector-specific issue across either of them. Metnor’s recent focus was more around healthcare, and most of its sites were outside the North East as well – they only had Cramlington Hospital in the North East itself. Everything else tended to be around the Midlands and in the South.”

In contrast, general contractor Tolent – which has instructed Interpath as administrator – had a lot of sites in the North East, spread across multiple sectors such as supermarkets, high-rise office blocks and housing.

A common factor behind the fall of both companies, in Kelly’s view, was their exposure to fixed-price contracts and bad debts, as well as industry-wide factors such as the higher cost of materials and labour. “And there’ll probably have been a bit of a knock-on effect in terms of delays from the Covid-19 period.”

Often when a mid-size or large contractor goes under, companies in their supply chain are left with bad debt and a hole in their project schedule as contracts are cancelled.

“But actually, the one thing we haven’t seen from Metnor and Tolent yet is that domino effect rippling through the supply chain,” Kelly says.

Even so, Kelly adds that sector confidence in the North East has taken a hit. “I know some of the subbies are worried in case there’s another one [administration] out there, because those two happened in quick succession.”

On a national level, Kelly notes that the government’s Covid recovery loan scheme is still available for SMEs until the end of June next year. However, businesses that accessed the coronavirus business interruption loan scheme must make debt repayments, “so they are now having to properly service that debt and any other debt they’ve taken on over Covid-19 as well”.

Many lenders are supportive of businesses that have repayment issues, but some firms now face a “repayment cycle with a constant cash outflow”.

Allied to this wave of loan repayments is the phenomenon of ‘suicide bidding’ – when companies in financial trouble take on loss-making work so that some cash still comes in, while they hope for an upturn in fortune later.

“Construction’s one of those sectors where you can make losses, but you can still generate cash for a period,” Kelly notes. “And therefore, until there’s a hard stop, businesses can trade on, particularly at main contractor level.

“The way the cash cycle works, it can give companies more time hopefully to trade out of their situation. It can work – but only for a short period of time.”

Kelly’s eight tips for worried companies

Know who your counterparties are. “I’m not just talking about who your client or customer is – understand how strong your supply chain is as well.”

Make contingency plans. “If you’ve got certain key suppliers in place, what happens if one of them fails? How can you step in? What are your plans in the background?”

Be careful about the rumour mill and manage your message. “Rumours can be detrimental to contractors’ business as well as their clients’. Once rumours start it can be difficult for a business to survive, just because people might walk off site or down tools.”

Know your contract and its provisions. “I’m always surprised how often people don’t know what their contractual rights are with their clients and supply chains.”

Have your paperwork in place. “So often we [FRP] get involved and find that there are [contract] variations done on a handshake. If there’s no formal paper trail behind everything, it becomes more difficult to challenge at a later date.”

Monitor your contracts. “If anything goes awry, try to correct it early doors. If your company runs a loss-making contract, there’s nothing to stop you from trying to reprice the contract with the client or ask for accelerated payment. The client may not want your business to go bust, as it might cause problems for their long-term project plan.”

Understand which costs you can cut. “If your company has a bad debt, how long can your business survive in its current shape? What do you need to cut it back down to? Are there any quick wins from your cost base?”

Take early advice. If you notice your business is experiencing difficulties, “even if you are just worried”, then get some professional advice.

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