The construction sector’s road to recovery will be sign-posted by the three “Rs”

Published 16 June 2020

The first tentative steps are now being taken to ease the lockdown restrictions imposed on the nation as a consequence of the COVID-19 pandemic and thoughts are turning to how we can return to “normal”. The construction sector is no exception but finds itself in a slightly different position to many businesses as sites were never required to close (provided that work could carry on “safely”). Nevertheless the impact of COVID-19 has wreaked havoc on the finances of the construction sector and the viability of current and future projects.

The Construction Leadership Council (CLC) has taken the lead, working with the government, and produced Site Operating Procedures (now in its fourth version) providing guidance to construction companies on how to continue to operate safely and in compliance with Public Health England guidance.

“Roadmap to Recovery: An Industry Recovery Plan for the UK Construction Sector”

Continuing this work, the CLC has now launched “Roadmap to Recovery: An Industry Recovery Plan for the UK Construction Sector” which aims to drive the recovery of the construction and built environment sectors, and through them the wider UK economy. The Plan breaks the industry down into four separate sectors: infrastructure; construction; housing; and RMI (repair maintenance and improvement). Each sub-sector is to have its own sectoral recovery plans with the CLC setting an overarching co-ordinated industry strategy. Lead groups are identified for each sub-sector to continue the CLC’s task force approach.

The Roadmap sets out three stages: Restart, Reset and Reinvent. Although time-scales are set for each phase, they are not to be regarded as sequential. Indeed some actions have already been achieved such as the delay in implementation of the reverse charge VAT which would otherwise have required construction companies to find additional cash when cash-flow was already being squeezed. The CLC anticipates that recovery from COVID-19 will be gradual; lost output taking two years to recover.

1. The Restart phase (1-3 months) sets out what needs to be done to restart production, to keep people in employment and to avoid the disruption that would arise if the sector falls into a massive round of contractual disputes. Minimising contractual disputes will be an essential part of this phase as disputes will damage the industry, cost money and fracture supply chains.
2. The Reset phase (3-12 months) is about preparing for the future. It considers what needs to be done to develop a robust pipeline of work across the whole construction ecosystem and how to deal with loss of productivity due to the requirement to implement government guidelines. This phase also looks at promoting professionalism and strengthening capability in the supply chain; investing in training, collaborative business models, fairer contracts and payment.
3. The final Reinvent phase (12+ months) is more aspirational and considers how to transform the industry to create a more collaborative, fairer and resilient industry. This will involve adopting digital and manufacturing technologies, new approaches to procurement and energy efficiency and building stronger partnerships between the industry and its clients.

The impact of COVID-19

The work that needs to be done should not be under-estimated. The effects of the pandemic have badly hit both cash-flow and work-flow. The rush to close sites at the beginning of the pandemic obviously resulted in a loss of turnover. Shutting down and then re-opening sites incurred costs and at a time when payments were disrupted. Although the majority of sites are now open again, sites are unlikely to return to 100% productivity while the 2m social distancing rule remains in place. Many construction companies, typically operating on slim margins, will not survive.

The government’s financial support measures, although welcome, are not necessarily the panacea. Companies are struggling to take advantage of the government’s Coronavirus Business Interruption Loan Scheme. The process of applying for business loans has been slow and difficult, if not impossible. For example, a bank may want to know when work will resume or future projects will start; an inability to provide such details can lead to the loan application being rejected. Even where money is advanced, it will increase the level of debt, storing up problems for the future. The position is only going to get worse. Credit facilities and invoice financing are being tightening or removed adding to the financial difficulties.

The government schemes to support firms and self-employed workers have been a lifeline to the industry, paying the wages of nearly 1.5m construction workers. By the end of May 2020, £4.6 billion had been paid out to construction workers on the furlough and self-employment schemes. But what happens when these schemes come to an end – have they simply delayed the problems? Similarly the ability to defer tax will also increase debt obligations in the future potentially creating a ticking time bomb for the industry.

Insolvencies on the increase

As money started to dry up through the supply chains, 35 construction companies fell into administration in May 2020, up from 9 in April 2020. Another 65 companies were involved in some form of Creditors Voluntary Arrangement/insolvency process. Increasing numbers of insolvencies are a cause for concern for the industry as insolvency has a ripple effect.

1. Other parties in the supply chain are affected. For example, when a main contractor becomes insolvent, the employer is placed in a difficult position. If the employer makes direct payments to a sub-contractor to keep the project going, it runs the risk of having to pay twice if the administrator/liquidator subsequently requests the “same money” on behalf of the insolvent main contractor. However, if payments are stopped, it can have a domino effect resulting in further insolvencies down the chain.
2. Legislative change. The government is consulting on the Corporate Insolvency and Governance Bill in the hope that by granting businesses lifelines, they may survive. The Bill consists of eight measures that were bought in during the pandemic, but may now be made permanent. Notable within the Bill are the provisions to outlaw contractual clauses that made insolvency an automatic termination event.
3. With adjudication being seen as the way to facilitate cash flow, that process is in limbo when it comes to insolvency. We are currently awaiting judgment from the Supreme Court in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd on the issue of whether an adjudicator has jurisdiction to decide a claim made by an insolvent company and, if so, whether the decision can then be enforced.
4. Where proceedings are issued there will be delays as the courts struggle to catch-up on the backlog of cases and influx of new claims. Again, restrictions can come into play where a party to legal proceedings becomes insolvent. Under the Insolvency Act 1986, a moratorium or automatic stay of proceedings will arise when a defendant company enters into administration or liquidation respectively.
5. Insurers will also be affected. An increase in insolvencies is likely to lead to an increase in claims made directly against insurers under the Third Parties (Rights against Insurers) Act 2010. In what was already a hardening market with shrinking capacity, the construction sector may see further hikes in insurance premiums.

The CLC’s Roadmap to Recovery, even if only partially successful, could lead to dramatic changes in the sector and real progress towards achieving net zero; modernisation through digital and manufacturing technologies; better, safer buildings; and the “levelling-up” of the economy. Could the COVID-19 pandemic turn out to be the catalyst to radical change and a new way of working in the construction industry?