There is no avoiding the fact that the construction industry can be a difficult sector to crack. Whilst the industries gross value added (GVA) has grown steadily since 2009 to reach nearly £102 billion in 2016, SMEs operating within construction are not necessarily experiencing the same levels of growth.
There must be an emphasis on supporting all businesses working within the industry, as construction output in the UK contributes 7% of GDP and accounts for almost 3 million jobs, totalling 10% of UK employment overall.
With so much opportunity before you, it can sometimes be difficult to work out exactly why your construction business is not thriving as you feel it could. But with huge payouts after the completion of large projects come high-risk, costly periods that seem to go on with no end in sight.
It is crucial that your firm is prepared for the peaks and troughs associated with the construction industry as ups and downs are not just likely but essentially almost guaranteed. When the economy struggles, so do the businesses that work within construction, however when the economy begins to improve, the industry bounces back with more vigour than many SMEs are prepared for.
The team at Nucleus have outlined the various considerations your construction business should be making in order to achieve growth as the industry looks to finally be recovering after the shock collapse of Carillion.
1. Public or Private Sectors – Weigh Up Which Is Best For Your SME
Around 25% of construction output is public sector, leaving the other three quarters of construction work firmly in the private sector. Within the industry, there are three main sub sectors.
Whilst residential contracts pull in a whopping £42 billion per annum, there is a substantial difference between the public and private sectors. Whilst private residential work is worth £28 billion each year, the public residential work construction firms carry out is trailing behind in terms of money, bringing in exactly half of what its counterpart does.
This is in part due to the fact that the public sector has an arguably small new build programme worth only £4 billion, so when it comes to making the most money for your SME in the residential sector, private contracts are certainly your best bet to boost your profit margins.
This sub-sector accounts for the smallest portion in the construction industry, yet there is certainly money to be made here. Each year, infrastructure projects total £18 billion, with £11 billion made from private contracts and £7 billion from public work.
Infrastructure work tends to be heavily focused on civil engineering and these types of projects are typically long-term and part of major renewal and maintenance programmes. Whilst the payouts for these types of projects tend to be worthwhile for those businesses that can afford to wait, cash flow problems may start to emerge in SMEs and start ups who do not have the adequate cash reserves needed to continue operations comfortably.
Commercial and Social (45%)
The biggest sub-sector of all, however, is the commercial and social aspect of construction. Totalling £49 billion, with private raking in £29 billion and public a comfortable £20 billion, commercial and social projects easily come out on top where the potential to make money is concerned.
If your SME currently operates within the public sector and struggles to maintain a healthy cash flow from those kinds of projects alone, it might be worth exploring what contracts for the private sector look like and whether they are projects your business could potentially deliver instead.
Alternatively, there are ways in which you can bolster your chances of winning public sector tenders in the UK. By signing up to receive alerts for government contracts, your SME can tap into the UK public sector marketplace to win more business.
2. Take On the Right Projects
Not all projects were made equal and that is especially the case in the construction industry. Your firm might specialise in work directly involving quarrying and forestry, but if demand lies in projects relating to maintenance and the supply of housing, then it makes sense to broaden your offering to capitalise on profits.
Undercapitalisation is a huge challenge facing construction companies and the importance of pursuing projects that are the most profitable should certainly never be ignored. A mistake that many SMEs make is not accurately predicting how much money will be required to fund individual projects until milestone or progress payments are made.
At Nucleus, we understand just how unpredictable the nature of the industry can be and the extent of how much strain lengthy payment terms can put on your cash flow. Our construction finance enables firms to deliver projects with ease by providing a confidential pre-agreed funding line against stage payments, milestones and uncertified applications.
3. Be Better Than Your Competitors
The construction industry is highly fragmented and of the 300,000 businesses currently functioning today, 99.7% of them are SMEs just like yours.
The first step to being better than your counterparts is to accurately identify exactly who your direct competitors are. Attempting to out-price construction giants like Balfour Beatty will no doubt be a fruitless task, but learning which firms are on par with what your business offers could prove to be hugely beneficial.
Clients are spoiled for choice already and with the constant new entrants to the market, it is vital that you learn how to beat your competitors in terms of pricing, standards and timely delivery.
4. Place Value In Your People
This is generally the case in most industries, but perhaps even more so when it comes to the construction industry. Having the best people on your team is truly the key to success as without them, your SME will struggle to stand out from the legions of competitors beside it.
A good place to start is to always hire the most skilled workers. To do this, you must begin the recruitment process early. Hire your team months in advance of a project starting so that you can deliver any necessary training before work begins. Workers with years of experience and an abundance of knowledge will have projects lined up well in advance, so take all the steps needed to ensure those projects include working for your SME.
The process must not stop there though. Once you have found reliable, hard working individuals to employee for your contracts, retaining them is where the real challenge lies. Pay well, treat your workers better than your competitors and value the expertise they bring to each and every one of the projects they get involved with. When you find great people, never let them go.
5. Purchase Machinery and Equipment Whenever It Is Needed
Expecting your workers to produce amazing results with mediocre resources is a tall order and likely an outcome that won’t be reached. It is true that you get what you pay for, so if you want your clients to remember the flawless finish of every single project you deliver, a massive part of that is having the right machinery and equipment available to your workers.
Instead of dipping into your working capital to replace defunct or outdated machinery and equipment, consider taking out a secured business loan to help front the cost. With asset-based lending, your SME can borrow money against your business assets, including property, stock and machinery.
Expanding your construction business is never going to be effortless, but it definitely does not have to seem impossible and beyond the capabilities of your SME either. By striving to better understand your industry and vowing to consistently remain in the loop with updates regarding the construction sector, there is no reason why your firm cannot thrive and meet its growth ambitions.
For more SME advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 3805 9432 or email [email protected].