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Construction SMEs Need To Innovate To Survive And Succeed

By September 16, 2014 No Comments
Construction SMEs Need To Innovate To Survive And Succeed

Construction Site The chorus hailing the end of Britain’s property boom is growing. Even London’s frenzied housing market has started to slow. But, while recent years have seen soaring house prices in many parts of the UK, the smaller companies that build properties around the country have not always felt the positive effects of the housing boom.

Slow times for smaller house builders

Business activity among SMEs in construction fell sharply in the first three months of this year, according to Bibby Financial Services. And it is small firms that make up the bulk of the construction industry in Britain. One in five private sector firms in the UK is building-related, according to Government figures. This accounts for about 891,000 enterprises, about 73 per cent of which are small and medium companies.

The challenges for SMEs

The day-to-day reality for these SMEs is often hard. Whether working as roofers, builders, plumbers, electricians, or sub-contractors, there are many barriers that smaller operators face.

  • The wealth of regulations relating to environmental and health and safety issues tie companies up in red tape.
  • A lack of skills among workers has many firms struggling to recruit talent.
  • Big entities dominate the industry, particularly when it comes to winning public sector contracts.
  • The construction industry is typically project-based, which means that there’s little job continuity, leaving smaller firms vulnerable.
  • Access to finance is a real problem for many construction businesses, especially those at the smaller end of the scale. Late payment is also a problem.

However, small firms in the sector are beginning to show signs of greater optimism, with about six out of ten saying that they expect sales to improve slightly or significantly over the coming months. George Osborne’s commitment to the Help To Buy mortgage guarantee scheme has brightened the mood of many builders. Recent Treasury figures suggest the scheme is fuelling construction, though critics warn it’s creating a false floor in the housing market.

A question of finance – and chasing payment

There is strong evidence that smaller building-related businesses are lagging behind their peers in other industries when it comes to raising finance.

  • Six out of ten construction SMEs still rely on bank loans or mortgages, according to data from accountancy association MHA.
  • The same proportion – 60 per cent – said that they found it difficult or very difficult to obtain funding.

Recently, the Confederation of British Industry (CBI) called on the Government to give smaller construction firms greater support to grow through initiatives such as the British Business Bank, as well as helping them to find alternative sources of finance. Conventional lenders still expect SMEs in construction to demonstrate a strong track record, security against possible loans, and an established relationship with their bank. Traditional finance providers are also often reluctant to lend certain types of property and construction projects.

Companies working in these sectors are particularly prone to late payment. The average trade debt of a construction SME was £484,000 in the last financial year, a study of official data by Debt Guard Solicitors found. The smallest firms were the worst affected, being typically out of pocket to the equivalent of 16 per cent of their turnover. Experts recommend that business owners set out clear payment terms, and always chase as soon as an invoice goes beyond its payment deadline. But too many firms still go into administration because they’re owed funds by creditors.

Winning public sector work

Smaller companies struggle to gain their share of public sector contracts, which account for almost 40 per cent of all construction work in the UK. The Government has pledged that SMEs should account for a quarter of all central government contracts by 2015, but the Federation of Master Builders (FMB) estimates that many small construction firms are only successful in their bids ten per cent of the time. The FMB believes there are a number of ways to improve small companies’ chances of success.

  • Improve visibility of public sector contracts through proper use of the Government-funded Construction Pipeline.
  • Prevent public sector clients from ‘bundling’ projects to make them too large for smaller providers.
  • More detailed feedback to unsuccessful firms, telling them within 15 days of making a contract bid why they’ve not been chosen.

Filling the skills gap

If all of this weren’t enough, smaller construction-related employers also find hiring staff with the right technical skills a major trial. The FMB found that construction firms are struggling to employ bricklayers, plasterers and plumbers, while site managers and supervisors are also in short supply.

Much work has been done to encourage SMEs to hire apprentices and train up their own talent, as we’ve reported on this blog before. Apprenticeships have always been integral to the construction industry. But proposed reforms to apprenticeship funding that will see employers receiving apprentice funding directly rather than via training providers could dissuade building firms from taking on new trainees. It’s feared that the extra bureaucracy and financial burden are likely to put many small companies off taking this path.

A brighter future?

But it’s not all gloomy news for construction businesses. The future could hold some benefits for progressive building-related SMEs. Developments in technology are changing the industry, and they could make it easier for smaller firms to compete with larger operators, according to the Construction Industry Council’s BIM 2050 Group. Contract procurement will become automated, meaning those with the right technology will be at an advantage, regardless of their size. Digitising paper-based processes, greater use of 3D printing, and the introduction of self-healing building materials over the next 30 years are all shifts that smart small firms will embrace to steal a march on their bigger peers.

Innovation is the strongest weapon that smaller house builders have, both in terms of the service they offer clients, and how they operate their business in the day-to-day. Being small, they’re agile and able to adapt to new practices. It’s this that could keep them ahead of their competitors to ensure that they’re part of any future boom, while those that stand still risk going bust.
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