INTRODUCTION

Chapter 1: Background Information

According to the Department for Business Enterprise and Regulatory Reform (BERR), the UK construction industry has 250,000 firms employing 2.1 million people, and contributes 8.2 percent of the nation's Gross Domestic Product (GDP). Construction companies provide employment for every skill level from labourers to architects as well as the opportunity to work for every size of firm from family run businesses, to major contractors. Its efficient operation and competitiveness is also essential to the fulfilment of the Government's commitment to improve public services and infrastructure. The delivery of new schools, hospitals, affordable housing, eco homes, all depend on the success of the construction sector to deliver.

Key issues the construction industry is facing in 2009

With cut-backs, uncertainty and more red tape it looks as if 2009 will be a challenge. To say the year has been one of turmoil and change is an understatement. The reeling financial markets and the swelling sense of gloom overshadowing the general economic outlook have, naturally, a corollary in the construction industry - always a lag barometer for the economic climate.

And the uncertainty is far from over. If some experts are correct, we may be witnessing just the initial battering of the storm. Mervyn King, Governor of the Bank of England, has admitted it is likely that the country is heading for a “prolonged and painful recession”.

In the last twelve months, the national and global situation has worsened. So in this light, below are the authors' predictions for the biggest issues that UK construction will face.

Skills

The recession is forcing employers to look at restructuring and, ultimately, redundancies.

For an industry that has enjoyed a boom for years, this is going to be a massive change of mindset - employers need to be very careful they manage any redundancies properly or we will see an increase in litigation in this area.

However, and perhaps perversely, the industry will continue to suffer major skills shortages, particularly in the South-east, where 2012 is a tremendous opportunity, but one which casts a skills shadow.

This time, project management skills will be in short supply, due to lack of training facilities or lack of investment in education sponsoring from construction companies, rather than labour, where the situation regarding migrant workers who may be returning to their native countries will continue to remain unclear into 2009. Sectors like caring, which still needs a lot of people will attract all the labour force.

Temporary workers

Agency workers are soon to be given similar rights to permanent staff. It is proposed that the law will change in 2010. The new law will mean that after 12 weeks on assignment, an agency worker will be entitled to ‘equal treatment' - meaning the same basic working and employment conditions as a comparable permanent employee, including equal pay, notice and holiday entitlement.

For an industry that employs a large volume of temporary workers, this is going to be an administrative and financial challenge that will really make itself felt in 2009.

Health and safety

The recent downward trend in construction-related injuries may well be over, and 2009 could see a significant increase since contractors will be looking to cut down costs on training and overlooking basic safety measures.

There are suggestions that considerably different levels of adherence to health and safety rules are due to the rapid influx of migrant workers. Different people behave and act in different ways although all working for UK construction companies. There are some people who are very meticulous about their work and adhere to each and every smallest safety precautions while there are others who can consider petty measures as time wasting. If evidence of this emerges in 2009, we could expect the industry to experience a crackdown from the HSE.

We expect to see increasing postponement of Local Authority maintenance work, which will hit small contractors and subcontractors the hardest.

The Government is talking about major investment in new schemes. The consequence is that, even allowing for more lending, spend will have to be clawed back from somewhere.

It seems inevitable that this will be from maintenance. This will be counter-productive, as maintenance work - which puts money into the pockets of smaller contractors, quickly - is usually the fastest way to stimulate the economy.

House building

For what seems like forever, the Government has been hugely vocal about its target for three million new homes by 2020 and 10 ecotowns by 2020.

As Construction News reported, housing minister Margaret Beckett is already re-articulating these as “ambitions” and “hopes”, rather than firm commitments. (from www.cnplus.co.uk/story.aspx)

It would seem inevitable that “ambitions” might be downplayed further and become “future aspirations” before long. This will provide more worry for subcontractors who rely on the house-building sector for some of their work.

The fact that the UK is still suffering a major shortage of housing - particularly affordable housing, regardless of falling house prices - does mean, however, that this semantic juggling will only be a 2009 phenomenon.

Top 20 Construction Companies Q2 2009

The Top 20 construction companies' league table, by construction news, ranks the UK's 20 biggest construction companies by turnover and profit, as follows. The table is updated quarterly, and was last updated inJune 2009. New Infrastructure

New infrastructure output in the 12 months to the first quarter of 2009 was 7 per cent higher compared with the previous 12 months and the first quarter of 2009 was 2 per cent higher compared with the previous quarter. The outlook is becoming increasingly gloomy as the worsening economy hits the capital. London escaped the worst of the construction slowdown for much of 2008. Indeed, the value of underlying work starting on site fell by just 3 per cent in 2008.

But construction starts in London fell sharply in the fourth quarter of 2008 as the worsening economic conditions took hold. The value of underlying construction starts has continued to slide during the opening months of 2009, with starts during the three months to February 35 per cent down on a year earlier. With financial and property related firms reducing their workforces, many developers have put planned construction projects on hold.

The value of underlying office starts, which accounted for about a quarter of the value of underlying construction starts during 2007, fell 21 per cent last year. That said, some developers are still pressing forward with major office projects. Tighter mortgage conditions and sustained pessimism in the residential housing market are now severely impacting private housing construction in London.

Having held up well during the first half of 2008, sector starts in the capital are now following a similar trend to the rest of the country. The value of underlying construction starts was 150 million in the fourth quarter 2008, down 73 per cent on a year earlier.

Construction prospects in London are becoming increasingly gloomy. The value of projects in the pre-construction pipeline has fallen away sharply, with underlying planning approvals falling by 36 per cent in value during the fourth quarter of 2008.

Large projects are a significant feature of construction activity in London. At first glance the preconstruction pipeline for large projects looks promising. However, given the current economic climate, there is likely to be a higher than normal proportion of planned large projects to be either delayed or abandoned. This is due to the fact that the government is planning to spread its restricted allowable budget across several other vital sectors such as education and health. Nonetheless we should breathe a sign of relief when looking at big projects such Cross rail where preliminary works have begun this year and construction starting in 2010. We should also be looking at temporary relief projects such as the Olympics which need to be completed by mid 2012. These important projects are acting like a lifeline for major construction companies, while waiting for the bad economic climate to change a bit. Overall, construction starts has significantly deteriorated in 2009, which has affected small contractors a lot but there is still a glimmer of hope for major firms with very few massive projects.

Chapter 2: History of recession

The word recession has several meanings. The simplest one could be, a recession happens when our neighbour losses his or her job, and it is a depression when we are made redundant. Economic textbooks tell that a recession is what happens when the economy shrinks for six months on the trot. GDP is used to measure the size of the economy, and when the figures go negative for two successive three months periods (or quarters) the technical definition is met (from http://business.timesonline.co.uk/tol/business/economics/article5753844.ece).

When recessions are prolonged past several months, they become depressions. Unlike recession there is no widely accepted textbook definition of a depression, although some say it comes when GDP shrinks by a total of 10 per cent. It will feel distinctly like a depression if a recession goes on for more than a year. After two years, talk of recessions is sure to be replaced by ultra-glum references to depression.

Credit crunch timetable

Year 2007

  • In February HSBC gives an early sign of the crisis to come when it warns of higher than expected mortgage defaults in its US business.
  • In August BNP Paribas suspends three funds exposed to sub-prime mortgages. European Central Bank pumps 95 billion into the markets.
  • In September Northern Rock seeks emergency funding. First run on a UK bank for more than 140 years.
  • In October UBS, of Switzerland, is the world's first major bank to announce losses from sub-prime-related investments, totalling $3.4 billion.

Year 2008

  • In February Northern Rock is nationalised.
  • In March Bear Stearns, the US investment bank, seeks emergency funding and is sold to JP Morgan in a cut-price deal, sparking week of turmoil in stock markets.
  • In April Nationwide records first annual house price fall for 12 years.
  • In September Lehman Brothers, the US investment bank, goes bust. Bradford & Bingley is nationalised.
  • In October The Icelandic banking system collapses. Royal Bank of Scotland, Lloyds TSB and HBOS are partly nationalised.

Year 2009

  • In January UK officially enters recession.
  • In March Base rate cut to 0.5 per cent.

The credit crunch refers to a sudden shortage of funds for lending, leading to a resulting decline in loans available.

A Credit Crunch can occur for various reasons:

  • Sudden increase in interest rates (e.g. in 1992, UK government increased rates to 15%)
  • Direct money controls by the government (rarely used by Western Government's these days)
  • A lack of liquidity in the capital markets

The recent credit crunch was driven by a sharp rise in defaults on subprime mortgages. These mortgages were mainly in America but the resulting shortage of funds spread throughout the rest of the world.

Steps to 2007 / 08 Credit Crunch

  1. US mortgage lenders sell many inappropriate mortgages to customers with low income and poor credit. It is hoped with a booming housing market, the mortgages will remain affordable.
  2. Often there was lack of controls in the sale of mortgage products. Mortgage brokers got paid for selling a mortgage, so there was an incentive to sell mortgages even if they were too expensive and high chance of default.
  3. To sell more profitable subprime mortgages, mortgage companies bundled the debt into consolidation packages and sold the debt on to other finance companies. In other words, mortgage companies borrowed to be able to lend mortgages. The lending was not financed out of saving accounts, for example.
  4. These mortgage debts were bought by financial intermediaries. The idea was to spread the risk, but, actually it just spread the problem.
  5. Usually subprime mortgages would have a high risk assessment rating. But, when the mortgage bundles got passed onto other lenders, rating agencies gave these risky subprime mortgages a low risk rating. Therefore, the financial system denied the extent of risk in their balance sheets.
  6. Many of these mortgages had an introductory period of 1-2 years of very low interest rates. At the end of this period, interest rates increased.
  7. In 2007, the US had to increase interest rates because of inflation. This made mortgage payments more expensive. Furthermore, many homeowners who had taken out mortgages 2 years earlier now faced ballooning mortgage payments as their introductory period ended. Homeowners also faced lower disposable income because of rising health care costs, rising petrol prices and rising food prices.
  8. This caused a rise in mortgage defaults, as many new homeowners could not afford mortgage payments. These defaults also signalled the end of the US housing boom. US house prices started to fall and this caused more mortgage problems. For example, people with 100% mortgages now faced negative equity. It also meant that the loans were no longer secured. If people did default, the bank couldn't guarantee to recoup the initial loan.
  9. The number of defaults caused many medium sized US mortgage companies to go bankrupt. However, the losses weren't confined to mortgage lenders, many banks also lost billions of pounds in the bad mortgage debt they had bought off US mortgage companies. Banks had to write off large losses and this made them reluctant to make any further lending, especially in the now dangerous subprime sector.
  10. The result was that all around the world, it became very difficult to raise funds and borrow money. The cost of interbank lending has increased significantly. Often it was very difficult to borrow any money at all. The markets dried up.
  11. This affected many firms who had been exposed to the subprime lending. It also affected a wide variety of firms who now have difficulty borrowing money. For example, biotech companies rely on ‘high risk' investment and are now struggling to get enough funds.
  12. The slow down in borrowing has contributed to a slowing economy with the possibility of recession in the US a real problem.

Credit Crunch in the UK

  1. UK mortgage lenders did not lend so many bad mortgages. Although mortgage lending became more relaxed in the past few years, it still had more controls in place than the US.
  2. However, it caused very serious problems for Northern Rock. Northern rock had a high percentage of risky loans, but, also had the highest percentage of loans financed through reselling in the capital markets. When the subprime crisis hit, Northern Rock could no longer raise enough funds in the usual capital market. It was left with a shortfall and eventually had to make the humiliating step to asking the Bank of England for emergency funds. Because the Bank asked for emergency funds, this caused its customers to worry and start to withdraw savings (even though savings weren't directly affected)
  3. As a result of the credit crunch, the UK has seen a change in the mortgage market. Mortgages have become more expensive. Risky mortgage products- like 125% mortgages have been removed from the market.
  4. UK Banks continue to face problems. HBOS (Owner of Halifax) struggled to finance its balance sheet. Like Northern Rock, it financed an expansion of lending by borrowing. Now money markets have frozen up, they couldn't raise enough money to maintain liquidity.
  5. Falling House prices. Now that mortgages are difficult to get, demand for houses has slumped. Therefore, house prices have fallen. Lower house prices mean many face negative equity. Therefore, mortgage defaults now cost banks even more (because they can't get back the initial loan.
  6. Bradford & Bingley was nationalised because it couldn't raise enough finance. The B&B had specialised in buy to let loans, which are particularly susceptible to falling house prices.

How long will the Credit Crunch Last?

The credit crunch could last a long time. This is because:

  1. House prices are still falling in the US, reducing the value of mortgage loans
  2. Many homeowners still face rising interest rates, when their introductory periods come to an end
  3. It can be difficult to regain confidence in the financial markets
  4. A recession in the US and global downturn could cause a further rise in bad loans
  5. The cheerfully named Profile of Depression shows the fall in UK economic growth, as measured by GDP, following some ofthe key slumps of the past century. It compares these to today's crisis.
  6. It illustrates the level of fear among experts about the financial hurricane that has disabled Britain -the ‘Noughties' bust had, until very recently, actually been worse than the Great Depression of the 1930s (although it was less ‘Great' in Britain than it was in the US, where GDP shrank by more than 25%).

LITERATURE REVIEW

Chapter 3: Effects of recession on UK construction Industry

  • First of all, some uncomfortable facts and figures:
  • 4,500,000 - people on council house waiting lists
  • 300,000 - construction jobs in danger across the sector
  • 90,000 - predicted job losses for Small and Medium Enterprise (SME) builders
  • 71 percent - fall in workload for the Federation of Master Builders (FMB) private house builders
  • 61 percent - FMB companies expecting lower workloads in 2009 quarter one
  • 60 percent - FMB companies reporting fall in workloads for fourth consecutive quarter
  • 52 percent - FMB builders warning they will be making staff cuts over the coming months
  • 16 percent - house price fall to date
  • 8 - construction companies going into insolvency every day
  • 7.5 percent - fall in building prices in the last quarter of 2008.

The construction industry has been particularly badly hit as a result of the credit crunch and the down turn in the housing market. The industry is facing its biggest challenge for many years. The indicators are that many will struggle to survive in the current market, with the Royal Institution of Chartered Surveyors (RICS) predicting the loss of over 300,000 jobs within the industry and with 52 percent of FMB members warning that they will be making staff redundant over the coming months.

There is currently a crisis in the housing market with many first time buyers unable to get a mortgage let alone afford a first home. Alongside this there are more than 90,000 families living in temporary accommodation and 1.6 million families on council house waiting lists; the case for building new homes is therefore very clear. However, news from the National House Building Council shows new home starts being at their lowest level since 1924.

The authors feel that current proposals to deal with this desperate situation don't go far enough in tackling the real problems affecting the UK construction industry and the wider housing sector. If the UK construction industry is to have any realistic chance of surviving this recession, these 10 key issues need to be addressed to kick start the building industry.

The effects of the recession are affecting all aspects of the UK national economy. In December 2008, the construction sector shrank at its fastest pace since records began. The most considerable decline was registered in house building, while the civil engineering and commercial sub-sectors also fell at record rates during that month.

As well as the decline in the housing construction sector, the housing market has also slumped. According to the Halifax, house prices fell 16.2% in 2008, the biggest annual decline since it began keeping records in 1983. This has made buying a home more affordable when set against earnings than at any time since April 2003. However, getting a mortgage is difficult for many. Data from the Bank of England showed the number of mortgage approvals fell to 27,000 in November 2008, representing at least a nine-year low (from BBC News, 2 January 2009, www.news.bbc.co.uk).

Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing and Supply, said: Once again, the housing sector bore the brunt of the crisis as purchasing managers reported significant reductions in new business. Amidst a climate of doom and gloom, firms were forced to axe more jobs in preparation for what is set to be another year of trouble and turmoil. (from Times Online, 5 January 2009, www.timesonline.co.uk)

The UK government has plans for public spending and it is hoped that these will include major construction projects, such as roads, schools and other public buildings. This would help the construction industry and those companies that supply the construction industry to ensure continued employment for many.

Businesses in the construction industry therefore need to ensure they remain competitive during this difficult economic climate. At the same time, they need to prepare the business to be able to take advantage of any future upturn in the market.

Everyone knows the downturn has hit the industry badly. But research commissioned by The Construction News from Emap Glenigan shows the true extent of the contraction, how it breaks down by sector and region, and what the likely outcome for the rest of the year will be.

Parts of the industry - private housing, offices and industrial - are badly affected by the deteriorating economic conditions and the credit crunch. The situation is brighter for those with jobs in infrastructure and the Olympics, although neither of these will be enough to sustain overall industry activity.

Historically, economic growth below two per cent has been associated with falls in construction output. Last month, GDP growth for the second quarter was revised down to zero. Consensus forecasts suggest prospects for growth will slow even further in 2009.

The gloomy economic conditions have led to a sharp fall in the flow of new projects in the pre-construction pipeline. Glenigan expects construction starts in the UK will fall by five per cent in value during 2009.

Private housing has been most affected by the credit crunch. The reappraisal of risk by the banking sector has arguably led to more appropriate criteria for accessing credit. However, as a result the asset price bubble in the housing market has burst.

This is causing a long-term contraction in demand since prospective buyers can no longer borrow as much to finance house purchases. Inevitably, those in private housing construction will have to find a way to either cut per unit costs or, more likely, adjust to a new, much lower, level of housing demand.

The impact of the credit crunch on other private sector parts of construction - industrial, offices, retail and hotels - is different. These sectors have not suffered from the asset price bubble evident in private housing. However, investment in each of these sectors is affected by the prevailing economic conditions.

As such, the immediate outlook is bleak but, with the Olympics on the horizon, construction prospects for the sector should start to improve in the latter half of 2009, when all major works will need to be started in order to be ready for 2012.

The Government has had an ambitious construction-related spending programme across a number of sectors. Education and health in particular will benefit from an increase in the value of construction projects this year.

But the Government is not immune to the economic slowdown. The absorption of Northern Rock has already put the Government's finances under pressure. Falling retail sales, rising unemployment and a decline in the profitability of UK firms will reduce tax receipts and add to its difficulties.

Looking forward, the poor state of Government finances may jeopardise some of its proposed construction schemes. Major infrastructure projects will continue to help buoy the UK construction industry. Projects such as the widening of the M25 motorway and Crossrail are set to provide a boost to the sector. Ongoing projects such as Thameslink and the Edinburgh tram line will continue to contribute to the sector's workload for some time yet. Outside transport, the sector should also benefit from increased capital expenditure by water and electricity utilities.

At present, the macroeconomic and sector-specific conditions are having a much bigger impact on the UK construction outlook than regional factors.

Regional variations

Differences in the composition of construction sectors within each region explain much of the variation in the region's respective prospects.

For instance, regions where industrial construction is relatively significant, such as the West Midlands and Yorkshire and Humberside, will see the value of construction starts contract this year. The North-east, which has relatively less exposure to private housing than other regions, is faring better.

Construction orders down 9% as property market slumps

New orders in the British construction industry have continued to plunge as building firms are battered by the credit crunch.

The Office for National Statistics said that orders fell by 9% in the three months to November, compared with the previous three months. They were 27% down on a year-on-year basis.

The figures showed that new construction orders were particularly weak in November itself, diving 38.6% year-on-year.

The private housing sector was a major casualty, with new orders down by 55% compared with a year ago. All the UK house builders have dramatically reined in their activity and cut jobs as the housing market has slumped.

Howard Archer, chief UK and European economist at IHS Global Insight, said the data showed that the construction sector's recession deepened markedly in the fourth quarter of 2008. He sees little prospect of conditions improving soon.

“With housing market activity and prices likely to remain depressed for some considerable time to come and the commercial property sector in dire straits, the construction sector looks set for extended weakness, despite some support from the government bringing forward some public construction activity and infrastructure spending as part of its fiscal stimulus package,” Archer said.

Accountants Grant Thornton said that the construction and property sector was set to be the worst casualty of the economic downturn in 2009, plummeting by 75% in profitability and 71% in turnover from the same period last year.

Clare Hartnell, head of property and construction at Grant Thornton, said: “Profitability and turnover within the construction and property sector are significantly driven by sales and market value; 2008 was a turbulent year as credit dried up and confidence plummeted, causing house prices and the number of properties sold to fall sharply. The decline in the residential market consequently has had a knock-on-effect on the construction sector, where problems have been exacerbated by huge debts as many proposed developments have been put on hold.”

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The year 2009 is set to be a trying year to say the least. Part of the reason for this is the current state of the economy. Lack of available credit will have an adverse effect on the ailing construction and property sector.

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The June Glenigan Index reveals that promised government funding has finally begun to filtering through to project starts. In particular a rise in educational, health and social housing projects starting on site have helped steady the Index, cutting the year-on-year decline to 20%.

Workload trends: Infrastructure

Infrastructure saw the value of underlying planning approvals (covering schemes under 100M) fall sharply last year. Whilst the fall appears to have dampened the flow of project starts, with the value of underlying project starts during the first five months of 2009, 13% down on a year earlier, the overall prospects for the sector are bright. With the help of the new infrastructure planning commission, it is hoped that new planning consents for key projects can be accelerated.

Impact of the recession on supply chain

The construction industry has got the largest supply chain, compared with other industries. It ranges from mere nails to large modular constructions. It has been a major contributor since the dawn of this industry and has risen in vigour and strength over the years. Its integration with our industry has created a revolution that triggered the rise of new technologies powered by their contribution. This general introduction, gives us a fair knowledge of the value of supply chain to the construction industry.

When this unexpected recession struck the markets with tremendous force, the construction industry felt the tremor, and its repercussions were felt throughout its branches. As the properties and developments went down, demand dropped, which in-turn left the developers with no option but to suspend majority of their works. The great “feeders” - supply chain took its toll. Demand for their products vanished. Then the only rule of law that applies is “Survival of the fittest”, i.e. the one who could bring best deals could survive (both in price and Quality) and others would go bust. By and large the prices soured.

Illustration with an example would clearly explain what the authors are trying to convey. Major components of our industry are cement, ready-mix, rebar and structural steel. Their price variation could indicate the trail recession took.

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All major supply resources have dropped in price dramatically one or the other time, to merely survive this recession rather than making profit. One of the major suppliers, now are for the ODA. Even they are experiencing the crunch. All the pre-allocated works, which assured definite return, are re-examined to align with the new prices. This has created friction, and even few of them moved on for adjudication. ODA has awarded contracts to around 1036 suppliers, most of which are small to medium sized businesses. This is a government initiative to prop up the middle class players, and there-by securing best deal contracts. Similar public investments could be seen in the health and education sectors, which form large part of the construction order-book and keep the pressure off.

The main issue here is the growing trend of irresponsible pricing to win the scarce bids. That is, pricing below the cost. Many experts have warned of the return of industrial dispute culture of the 1980. This could ruin the objective.

Recessionary impact was clearly felt when private investments dried up and forced the government twice to dip into the contingency budget. Due to this ill demand, there has been deterioration in construction product manufacturing. All heavy side manufacturers and 91% of light side manufacturers reported that sales had fallen; unprecedented results have been collected, research shows.

Key research findings are:

  • 62% of building contractors report that output fell in Quarter 1 compared to Quarter 4 in 2008 and 60% report that output will fall further in the next quarters.
  • 100% of heavy side manufacturers reported that sales were lower than in the previous quarters.
  • 56% of specialist contractors reported that order books fell in the first quarter of 2009, indicating that output was likely to fall further.

RESEARCH METHODOLOGY

Chapter 4: Trend Analysis of five major UK construction firms

Let us now compare the effects of the credit crunch on 5 of UK's top construction companies. Figures have been taken out from the respective annual reports.

Belfour Beatty:

This chart from Balfour Beatty's official report clearly shows the weakening of almost all assets in the first half of 2008 which was at the peak of recession. The total assets have dramatically fallen from 4544 to 4016 during this period. None of them were exempted from the consequence of this recession.

Investments:

By analysing the above figures, we could again come to the reality of situation. The significant fall of revenues for both PPP (from 451 to 180) and infrastructure (from 553 to 222) is a clear indication of the force of this economic turmoil. Belfour Betty which is considered as the top construction company in UK has not been left unaffected.

The figures on INVESTMENT INCOME clearly show how far it has been eroded on its transition from 2008 to 2009. At 43m in 2008 and on reaching 2009 it has been devalued to 17m. The figures clearly shows the fall from 19- 17. It's all bad news for the employees after all. No income means, no money to circulate and there-by lesser new projects to take on.

Now let's analyse the costs incurred in 2008 through to 2009. From 24m in 2008 to 38m in 2009. That's all bad news; here the efficiency of the company is at stake. Recession has taken its toll on efficiency.

Deferred tax has shown a significant rise from 8 to17 during its transition from 2008 first half to 2009 first half. And Tax payable in comparable periods has reduced as a consequence of reduced revenues.

The effects of recession could be clearly visible in the order book of this particular company. A 14% reduction in the order book is a bad-news. It signifies the drastic reduction of future work loads. Companies ace sectors like building services has not been left untouched. 1 % reduction was felt it as well.

Share Price chart

Due to the effect of the recession, the share prices of Balfour Beatty have declined considerably (see Fig 4.3). And the company's P/E ratio's has bore the crunch of it too as shown in the graph below. There has been a considerable decline in the price earnings growth (PEG) ratio from the year 2006 to 2008. This portrays the slowing downturn of the economy. The Return On Capital Employed (ROCE) is another function which illustrates the performance of the company. It has tried to maintain the investors hope by bolstering up the Return on Capital Employed values. This could be taken as a desperate measure to retain the investor hopes. There has been a rise in turn over per share which can be explained by the declining share prices. Due to the recession market prices of shares have been very low. The gearing is increasing as the company seems to be having cash flow problem. So they have to borrow in order to finance the company. Balfour Beatty's quick ratio is a clean indicator of the company's short term liability. Higher this ratio, better the position of the company. It determines the company's ability to meet short term obligations with its most liquid assets. There has been a constant decline in the quick ratio values from 0.84 to 0.68 over the period of 4 years.

Kier Group

Now let's have a comparison between 2007 and 2008 for Kier group, and analyse the effects of recession on this major organisation.

Kier Group is a leading construction, development and service group specialising in building and civil engineering, support services, private house building, property development and the Private Finance Initiative. The Group employs over 11,000 people worldwide and has annual revenue in excess of 2.4bn.

Interim Highlights:

Underlying pre-tax profits during 2008 is just 26.4m while in 2007 it is almost double the amount peaking to 35.6m.

In 2007 the underlying EPS was a whooping 90.3p, and in 2008 it went into a slide reaching just 51.1p.

Net cash at 31 December was accounted at 82.2m whereas in 2007 it was hovering at an amazing figure 3.20b.

REVENUE:

6 months to 31 December

From the pie chart we can clearly infer that the revenue from construction, support services and partnership homes are having an upward trend, except developments. It has drastically shrunk from 5% to 2% which indicates that there are less new developments and thereby less work in the coming future.

Construction KPI's:

It is the KPi's (Key performance Indicators) which gives a clear insight of how the company had performed. So in this analysis, most gives a good impression except the Order book, which is an important yardstick for future projects. Bad order book indicates a bad future. So the recession has pinned down the growth, and desperate measures should be in place to pull it on track.

The Kier Group is thriving to sustain by the forthcoming PowerStation opportunities due to strong track record. It is mainly concentrating on PFI projects which could lock in some large projects for the future and there-by survive this economic turmoil. Excellent public sector awards and opportunities coming through for support services and construction. The figures have clearly demonstrated that the property markets are fallen, so its focus relies on network rail joint venture and UK Supreme Court. These proposals could enrich their order books and enlighten the path towards success.

A lesser price per earnings ratio signifies higher earnings. There has been a three fold increase in price per earnings ratio for the Kier group from 30/06/08 to 30/06/09. This increase in price per earnings ratio from the year 2008 to 2009 may be explained as a considerable decline in earnings with less change in share prices. It demonstrates the dire situation of the construction industry at the moment. A drastic decline of the return of capital employed can be seen from the year 2006 onwards. This shows how the return on capital has been declining throughout the years, nevertheless to mention the destiny.

Due to the recession Kier's group turnover has decreased from the year 2008 to 2009 that is what explains the decline in TPS. The operating margin is a measure the company's pricing strategy and operating efficiency. Higher the margin, the better it is for the company. But in this case it has declined from the year 2008 to 2009 due to the decline in operational income.

Interserve plc

Interserve plc is based in the UK and is a FTSE 250 company. It has revenue of 1.8 billion and a workforce of 50,000 people worldwide. It is a services, maintenance and building group operating in the public and private sectors in the UK and internationally. They offer advice, design, and construction and facilities management services for society's infrastructure and provide a range of plant and equipment in specialist fields.

The company's overview has shown robust performance with all key figures in positive track, Now lets observe the growth nature and sector-wise contributions, to track the footprints of recession and how each performed albeit this great downturn.

Overview of company:

  • Double-digit earnings growth
  • Excellent cash generation, net debt reduced to 85m
  • Record future workload, improved forward revenue visibility
  • Confident of robust near-term performance
  • Executing on long-term growth strategy
  • Interim dividend increased to 5.5p (H1 2008: 5.3p)

ChartImage ChartImage

The share price chart clearly shows how it has slumped over the years due to this lasting recession. From mid 2008 it starts dropping and has been experiencing a freefall from 516, 40 nearing to 156, 40. This steep fall has eroded investor interests, and locked away in these dire circumstances. The only survival option for them as well as the company is to harness the government potential. And PFI projects are a good source of income.

The above pie charts clearly mention how the revenue has been distributed among various sectors and its contribution by type. The analysis of the revenue buy sector shows, the largest contribution was towards the defence sector about 22%, where government is the client. So it's the public money that leveraged the company from sliding down. And the least contribution was attributed by industry (just 5%) which indicates the pathetic condition of industrial sector, mostly owned in private hands. Our government has taken the right measures by investing in education, commerce, health etc to bolster up this economy.

Revenue mix by sector clearly shows the government initiative on spending rather than spending cuts. A whopping 64% of revenue came from Public hands and the private and privatised together holds just mere 36%.

FIG: 4.13 Hire VS Sales Mix:

Customer confidence can be clearly noted from the above figures. During 2008 there were more sales than hires, but when it came to 2009, the uncertainties led to more hires than sales. Customers became more cautious on spending,

The authors of this dissertation have tried to contact several construction professionals in a view to obtain more up to date information on the real effects of the recession on the construction industry but due to various reasons, they have been unable to get to concrete direct conclusions. Therefore all information has been taken out from official annual reports.

Interserve plc's price per earning has decreased from the year 2007 to 2008 due to the decrease in share prices and also due to increase in earnings. The recession has affected the share prices, but the earnings are increasing due to project maturing in later years. The company's turnover per share is increasing too due to an increase in turnover and decrease in share prices. The gearing is decreasing due to higher finance from the public, and this can be explained by lower share prices. Public are buying more shares and are making more profits. Hence higher dividends are obtained. Another possibility could be, to maintain demand in this economic slump, companies would prefer more dividends to attract more investors. This temptation to purchase shares with higher dividends could prop up the company value. The dividend per share is increasing due to the decrease in share prices due to lesser demand.

Carillion

Carillion plc is one of the UK's leading support services and construction companies, employing around 50,000 people. They have annual revenue of around 5bn and operations across Britain and in Europe, Canada, the Middle East, North Africa and Caribbean.

It has a portfolio of award-winning work in areas vital to society: health, education and regeneration, road, rail, defence and commercial property. From first concept to ongoing facilities management and support services, they provide high quality, cost effective and sustainable solutions, tailored to the needs of their customers.

Carillion is one of the few companies which has performed well during this severe slump. It has been experiencing an amazing growth over a decade, and there was no significant barriers as resistance, except this current downturn.

It is the Order book which shows the amount of future work secured by the company. The order book for the year 2008 was for a total of 20.4bn whereas the order book for the year 2009 is 19.7bn, which amounts to a difference of 0.7bn. This minor difference is not that bad as compared to other multi national companies which have been affected by the credit crunch. And the other encouraging figure is the 31% increase in underlying profits from operations to 72M. This shows that although the order book has decreased by a small amount, the profit has been increased by a considerable amount, which benefits the company.

Support services:

  • There has been 10% increase in underlying operating profits. Revenue has leaped 8% from 2008 figures.
  • The underlying operating profit has risen 10% from 2008 figurers.
  • Reported operating profit has shown an amazing jump of 65% from 2008 numbers.

Public Private Partnership Projects:

  • Striking 23% increase in underlying operating profit, midst of this recession.
  • Revenue has surged 9% from 2008 figures.
  • A similar 23% rise has triggered in reported operating profits.

The above share price chart for Carillion clearly demonstrates the fall of economy, through the difficult terrain it has been manoeuvring. September 2008 has seen the worst fall in years. The recovery is not expected soon. It would take years to acquire similar level of projects, but the helping hand form government should be utilised to its full potential.

FINANCIAL AND OPERATIONAL HIGHLIGHTS:

  • Total Revenue: +13% 2.7 bn (2008:2.4 bn)
  • Underlying Profit before Tax: +17% 62.2m (2008:53.6m)
  • Underlying Earnings / Share: +11% 12.8p (2008: 11.5p)
  • Interim Dividend: +12% 4.6p (2008:4.1p)
  • Reported Profit before Tax: +92% 51.9m (2008: 27m)
  • Reported Earnings / Share: +60% 11.2p (2008: 7p)

All the above figures have been taken from Carillion's annual report and the figures have been shown diagrammatically on the following pie charts.

Carillion's price per earnings ratio is decreasing from the year 2006 to 2008 as the firm's earnings is increasing, but share prices are decreasing. It could be attributed to the current economic slump. Maturity of projects can be the only viable reason for higher earnings mentioned. The company's turnover per share has increased form the year 2006 to 2007. Its gearing has also increased form the year 2006 to 2007. This may be due to cash flow problems.

More finance might have been needed and debt was cheaper than public funds. Also it has decreased in the year 2008 since more cash was available and this helped to pay off debts. The quick ratio has increased from the year 2006 to 2007 as there was more cash available due to high borrowings. Bit it was reduced in the year 2008 as cash were used to pay debts which in turn reduced the savings.

MORGAN SINDALL

Morgan Sindall is a star UK construction and regeneration business employing over 8,000 people and engaging in the commercial and public sectors. Its six main operating divisions are Fit Out, Construction, Infrastructure Services, Affordable Housing, Urban Regeneration and Investments.

The above graph clearly shows the share price collapse it has faced after peaking at around 1800 during 2007/08 period to just 400 while its transition to 2009.

Financial Highlights:

The above figures clearly demonstrate how hard the economic slump has hit the company. The revenue has fallen dramatically from 1.24m to 1.14m. Another key indicator- Profit before tax has taken a nose dive from 2008 figures to hit at 20.5m.But the dividend figures remains the same; as in the previous year.

The earnings/share figure has fallen significantly. From 50.1p in 2008 basic earnings per share has floored to just 34.6p. This shows the inability of the company to release the funds to its shareholders. The company needs to prop up using the available funds and invest wisely to sail through this economic storm.

Business Segments:

An analysis of the group's revenue and results by reportable segment in the six months ended 30 June 2009 is as follows.

The figures clearly show how the business segments have responded to this economic slump. It is just the infrastructure services which had shown a slight development, since the government funding was eminent during the period. Rest, all the figures were having a downward trend.

One Key Figure that tells us how the recession has eroded the company revenue is the PROFIT BEFORE INCOME TAX EXPENSE: A drop 28.6m to 20.5m is a terrifying figure, which could lead to significant cuts in the workforce.

Cash flow from operating activities:

The net cash outflow has dropped remarkably from 103.3m to a mere 15.2m. This is no good news at all. It is nearly six times less than the 2008 figures. It will have significant impact on the employment figures. No cash to spend means lesser workforce, which in-turn means lesser spending, triggered by unemployment. All in all it's a game of castle of cards; one small fall triggers the total collapse.

P.S. All figures have been taken from Morgan Sindall official website. http://www.morgansindall.com

Due to the effect of the recession, the share prices of Morgan Sindall have declined considerably. And the company's P/E ratio's has bore the crunch too. There has been a considerable decline in the price earnings growth (PEG) ratio from the year 2006 to 2008. This portrays the slowing downturn of the economy. The Return On Capital Employed (ROCE) is another function which illustrates the performance of the company. It has tried to maintain the investors hope by bolstering up the Return on Capital Employed values. This could be taken as a desperate measure to retain the investor hopes. There has been a rise in turn over per share (TPS) which can be explained by the declining share prices. Due to the recession market prices of shares have been very low. The gearing is increasing as the company seems to be having cash flow problem. So they have to borrow in order to finance the company. Morgan Sindall's quick ratio is a clean indicator of the company's short term liability. Higher this ratio, better the position of the company. It determines the company's ability to meet short term obligations with its most liquid assets. There has been a constant decline in the quick ratio values from 0.84 to 0.68 over the period of 4 years.

Brief summary of findings for the above 5 UK construction companies.

So all in all its bad time for construction Industry, a full recovery is not expected until 2012, which means there is a lot to be repaired. Almost all the companies are feeling the pinch of this economic slump. All the leading companies which were at the forefront are melting down with bad debts and weak order books.

Share prices of almost all the companies have floored at unseen depths. But for new investors it is prime time; if we sow now, we could reap huge profits in the near future. While comparing the ratios and gearing of the above mentioned five construction firms, it is clear that most of them have been affected by the financial crisis, but surprisingly enough, all the five companies turnover for the last four years have been increased. This is shown in the graph below. Figures have been taken from the companies respective annual reports and have been attached as appendix to this report. The reason for this rise in turnover could be the completion of numerous projects which were started before the financial crisis or the diversification of the companies' scope of works. These turnover figures are the only encouragement at the time being for these top five UK construction companies.

UK Construction Industry Sectors

The UK Construction industry can be broadly classified into 8 different sectors, namely Education, Health, Housing, Commercial, Retail, Transport, Water and Energy. In addition, there is one more sector, the PFI sector, especially in this bad economic climate, which is now becoming more and more popular among most major construction companies. While the government is tightening the allocated budget for infrastructure projects, the private sector is trying to encourage the development of projects by contributing a major percentage, thus allowing the construction industry to carry on surviving even in the recession.

All the above mentioned sectors are discussed more specifically as follows:

Education

This is one of the sectors which upheld a lot of prospects for the construction industry, for it decides the capability of future generations to come. Better education, in good atmosphere would significantly bring better results. And during the recession, those who could stick out their head are those equipped with better qualifications and understanding. In order to ensure better education for the future generations the government has drawn up a new programme called BSF (Building schools for the future). It is a noteworthy initiative by the government to bring up education on top of all Agenda's in order to bring the UK out of recession.

Numerous proposals are contained in the scheme, which could help the battered industry to bolster up in this recession. This scheme once untied can unleash a wave of revitalization for the industry. Top industry contractors are shelling their expertise in order to bring excellent bid proposals to the forefront, and those winning are securing projects that are worth millions and lasting for years.

This government proposal to improve all the schools in the country is a potential goldmine for contractors. The objectives of this BSF programme is to rebuid or refurbish all the country's 3500 secondary schools by 2023. In order for the ministers to hit the target the level of work should be accelerated or else it will remain behind schedule.

Health Sector

We all know it is another major sector which feeds up the construction industry with Government cash flow on major Hospital projects. It provides high value projects lasting for years and thereby employment to millions in the industry. When compared to other sectors, it is one of the few which has taken the blows without serious damages. The reasons are obvious, medical facilities cannot be considered as a necessary evil at recessions, it's a must to help existing and further generations to maintain a healthy life.

We could simply put in a mathematical expression connecting recession and Health.

Recession (directly proportional) Bad Health.

So in order to compromise this, we need more health facilities, and more funding means more facilities. Any Government, who-ever it may be who seeks the welfare of the society has to comply with the necessities.

Head lines from CN news reads, “HEALTH SECTOR IS SET FOR FULL RECOVERY” should not be a surprise to us. It's a livestock for professionals like us.

The effects of recession on the health sector can be demonstrated through the following statistics.

Even though the number of starts of work on site has improved, the number of plans approved has significantly gone down. That's the sign or epitome of recession. But the difference is not that much alarming since it will undoubtedly pick up sooner than later.

But we should also bear in mind that the media tends to portray, recovery situations in order to resonate to the frequencies of government, which vents out the public outcry. We, educated people should not be deluded by the media, but should try to uncover the true picture, and pose real demands, to bring our industry to lightness.

Housing sector

The housing sector is considered as a leading indicator of recession, which goes down first and early to pick up which indicates the end of recession. Any recession in the construction industry could be easily identified by analyzing the fate of the housing sector, or it's the litmus test for recession in our industry. When compared to the last recession this is worst. Housing starts are in the blues. Even the “green shoots” which we have seen last few months cannot save the face, which shows the housing starts this year set to hit their lowest point since 1945.

When compared with last year's 130,000 CPA (Construction Products Association) expects public and private housing starts to hit about 98000 this year, which shows significant decline. 1992 which showed housing starts at recessionary low (156,000), were even better if weighted against current recession. It is the housing sector which went into recession earlier than the rest of the economy in 1990, or just before, and came out earlier.

By the fourth Quarter of 1988, this sector had already shown two quarters of negative growth in output, while the economy did not go into recession officially until the fourth quarter of 1990.

From these we can see the centrality of housing sector in putting recession under radar, and could see more ink being spilt on speculating what will happen to the housing market.

Commercial sector

During the economic recession the commercial sector, mainly offices and retail is slower to react, but much quicker to fall, while sectors like housing shows an early decline. Double digit decline has been shown by private housing, 2 years before commercial saw any negative growth in the first quarter of 1991- two quarters after the recession began. Commercial sector only exited recession nearly three years after economy recovered.

Such history gives us a proper guide on trends toward economic recovery in different sectors. Lessons should be learned from the past and exit strategies should be drafted in order to make star-studded come-back.

As we all feared the fall is worst this time- from positive growth to double-digit decline in the last quarter of 2008. -25.8 per cent shift has been recorded during first quarter of 2009 and the record book doesn't look great either.

Order books in 2006 and 2007 were good so output in the first half of 2008 was still reasonably high. But sharp falls in new orders are going to filter through this year and next year. The CPA (Construction Products Association) anticipates an output of 9.7bn for 2011 - a fall of 7bn from the sector's record high of 16.7bn in 2008.

Retail sector

The retail sector overall has taken a whooping in recent months. When compared to last year like-for-like sales have dipped 7% in march this year. Most of the decay was in non-food sales with a like-for-like of -4.3 per cent. People are still flooding the shops but they are spending money on food and drink rather than furniture and other home wares - indeed food like-for-like sales were up 4.7 per cent on this time last year. As global commodity prices continue to ease, supermarkets may become more confident with their construction plans.

“Food is more resilient than non-food. Supermarkets are responding to the recession. They are trying to offer ever better value than normal and keeping up with their expansion plans,” says a spokesman from the British Retail Consortium. Food retailers constitute eight of the top ten retail clients and subsequently this year they have spent nearly 500 million on construction - Tesco chairs the charge with 11 new stores. Glenigan estimates there will be 406 million worth of construction starts for quarter three this year, up 21 per cent on a year ago.

According to the authors, the discounters would come out in force. For discounters, the recession represents a once in a lifetime opportunity in the UK and US. We believe that now is the time for the likes of Aldi, Lidl and Netto to pounce.

Transport sector

The transport sector is rationalising during recession. Probability is that the road transport industry will have been pruned by the time the European economy emerges from recession. However, according to Transport Intelligence chief executive John Manners-Bell, the state of the sector “could be worse”, as it has deflected a “catastrophic meltdown” over the past year as oil and financing costs have fallen. He acknowledged that “the European road freight market is in crisis”, with bankruptcies rocketing in response to falling volumes in recent months, caused by a slump in economic output.

This can forecast that many small and medium-sized road freight companies would be unable to survive the slump larger companies however will be in a stronger position acquiring market share as the sector rationalises. Figures published by the DFT in May disclosed that total freight traffic through UK ports fell by 3.3 per cent last year to 563 million tonnes.ADNFCR-8000176-ID-19289462-ADNFCR

Explanation with examples would give a better insight on the effects of recession in the transport sector.

Glasgow Airport rail link Axed by Scottish government:

The 400 million Glasgow Airport Rail Link project has been scrapped by the Scottish Government due to public spending cuts announced as part of the country's 35 billion budget plans. This decision clearly shows the measure the government is bringing out to rescue the country in light of recession. Even though the government is the biggest source of finance for construction, is feeling the sting.

There are 4 major modes of transportation namely road, rail, air and water. None of them had secured a shield form this current economic slump.

During this recession the road traffic has significantly reduced due to a reduction in unwanted travel, which has remarkably also reduced the greenhouse emissions. The figures released by the government have shown the reduction could be matched with 2005 figures. So that's a boon in a tragedy.

Secondly let's shed some light on railways. Latest news from ‘times online' tells us why the government is gearing up for any fare rise? The number of employees sacked from London city is so high that the current number of passengers is not enough to support the railways in generating income. Such a fall in train commuters can reduce the new rail works, and thereby lesser income for the sector.

We have seen large number of budget airlines filing for bankruptcy. Even few weeks back a European flight stranded its travellers at various airports by cancelling and filing for bankruptcy. Even the biggest airlines have taken severe blows. BA has reduced the salaries of its employees and all of them have suffered huge losses. All major airlines have reduced its workforce. Air Mauritius, the main airline company in one of the authors' native country has reduced its flight destinations by 20%. Last year, there was 7 direct flights from Mauritius to London weekly as compared to just 3 direct and 1 non-direct flights this year. This shows the extent that the credit crunch has hit the air transport.

Water

It is one of the utilities sectors where the government influence is significant. Almost all major companies are engaged in PFI projects which bring revenues and growth for the company and nation. Water is essential for human beings to survive, and its providers are considered as the unchanged for years. But this economic recession has even eroded the most secured sector. People of this sector is hard to be moved to other sectors; since they are different game players standing in construction. Fresh training is necessary for them to move on.

Let's flip through the current news and analyse the situation of this safest sector.

Is the water sector really recession-proof?

When recession hit, environmental consultancies looked around and thought ‘water'. But as economic conditions have worsened the water industry has sought to distance itself from any suggestion that it can single-handedly support the country's increasingly idle engineers, designers and environmental consultants.

On 7 April, the UK's water companies submitted final business plans for the 2010-2015 periods to the regulator Ofwat. Although Ofwat is expected to give some indication of its response to each company's plan in July it will not be until November that final decisions are made about the capital investment programmes the water firms will commit themselves to for the 2010-2015 fifth asset management programme (AMP5) and how much they will be allowed to charge their customers. Until Ofwat makes a move, water companies will commission little work, leaving consultancies to wait in the wings.

Utility giant Thames Water is blaming the recession and an awaited dip in demand from commercial customers for its decision to scale back plans for a major new reservoir in Oxfordshire.

The extent to which UK water companies are already feeling the sting of recession is difficult to evaluate. Some companies have admitted publicly that demand from commercial customers has remarkably fallen. Severn Trent made headlines in January when it forecast that step-down in consumption by industrial clients would translate into a cut in its 2008/09 revenues of up to 25 million.

Thames Water has also alluded to reduced commercial demand, quoting it as one of several reasons why it will no longer seek to open a new reservoir near Abingdon in Oxfordshire, by 2019/20.Two factors with the power to clinch water companies' finances remain on the horizon. First is the possibility that Ofwat will enforce tough caps on water prices. There is also the possibility that water companies will find it more costly - or simply more difficult - to borrow money during AMP5.

Energy

The economic recession has had an effect on the demand for both gas and electricity with estimates hinting that annual demand has diminished by approximately 5 percent and 6 percent between 2008 and 2009

Research shows that 235 billion of new investment was required by 2025 for the UK to meet its energy goals. Due to the current economic mood, in particular a fall in energy demand, this figure fell to 199 billion. This created an investment opportunity which if grabbed upon can set a baseline for future reductions and can embed change that could not be anticipated 12 months ago.

The above charts clearly demonstrate the reduction in indigenous primary fuel production. Coal, petroleum, natural gas and even primary electricity production has dropped form 2007 figures, even the consumption has dramatically increased over the years.Q1 of 2008 shows the imports, which has peaked whereas the exports has diminished, which clearly shows its effect on GDP. Higher imports and lesser exports is a bad omen, and the country's footsteps to recession.

But Britain has strapped on to bring change, to become independent on energy, and has launched the “Green revolution”. Many windmills and solar panels has been proposed and developed to fulfil this objective. This initiative to bring UK to the forefront of renewable energy production is the key for the success and brighter future. If we could stand on our feet without relying on middle-east petroleum, the country would see a new era of transformation and development. This would impact the users through price hikes in their energy bills to fund for this programme.

Energy deals have helped the top 50 companies to bolster up their books. Two bumper deals worth more than 1bn make January's top 50 contractor list the best for six months. The 2 biggest energy firms Alstom and DONG, scooped 1.17 billion of January's haul between them thanks to a major gas power station and a wind farm deal respectively. So overall analysis gives us a better picture; and it is the only sector which has seen significant developments during this crisis. They do well only because of government initiative and funding. But the latest news on spending cuts by the government may drown even this sector, but we should not loose optimism and think positively.

PPP (Public Private Partnerships)/PFI

Following the fiscal crises of the 1980s in many countries and the swing towards market friendly policies proclaimed by the World Bank and International Monetary Fund to get prices and policies right, many governments sought to tap the large amount of funds, resources, and expertise of the private sector. One way of achieving this objective is through public-private partnerships (PPP)) or public finance initiative (PFI). Consequently, with encouragement from the World Bank, the financing structure to procure public facilities began to shift from the traditional public procurement system towards the project financing model. For critics, PPP was seen as a form of “back door” privatization, but in the end, it made sense not to tie up substantial State funds in bricks and mortar. PPP is sometimes misunderstood as a cure for project failures. There are many causes of project failure from initiation to completion. The form of financing is certainly a major factor, but it is not the only cause of failure.

In a PPP, the public agency identifies the need, scope, timelines, (single or unitary) price, and output service levels using key performance indicators. A team of consultants may be appointed to assist the public agency to prepare the items above.

Often, the public agency is able to provide the site and invites the private sector to participate in the project. A Request for Qualification (RFQ) is used to pre-qualify bidders. After a reasonable period (e.g. a month) for shortlisted bidders to provide feedback and seek clarification, bidders are asked to present their proposed designs and bids based on the guidelines given in the Request for Proposal or RFP (see Chapter 6 for details on RFP). If successful, the private sector participants form an SPV to finance, build, operate, and transfer (if appropriate) the project after about 20 to 30 years. The exact delivery method varies from project to project. The transfer may take effect by having a site lease of only about 20 to 30 years. In the case of road projects, the SPV may be able to cover the costs by imposing agreed tolls. In cases where the SPV is likely to incur a deficit, the public agency may pay an annual fee. The SPV maintains the facility, leaving operational matters (e.g. running of a public hospital) to the public agency.

If the builder is also the operator, he will take into consideration the life cycle of the facility during design and construction to minimize subsequent maintenance and operation costs. This is a major advantage of a build-operate-transfer or build operate- own procurement system.

Importance of PFI during recession:

For the private companies to keep afloat there should be some sort of regular funding available. By partnering with the government, this major issue could be solved. All major UK projects are PFIs. The authors think that the government should be more pro active in PFI to prevent long-term under-investment in infrastructure and maintenance. PFI projects could lock in maintenance commitments for many years, making them relatively immune to public spending cuts. These measures could prop up our industry by leveraging with funds and projects.

New figures disclose 24 PFI projects were signed off in the UK over last six months worth more that 3.6 billion with Balfour the biggest player. PFI deals in the first six months of 2009 shows ranking of UK as 5th in global top 10.

The drying up of credit following the collapse of the banks had put a number of potential PFI projects like the Manchester waste project in jeopardy, forcing the Treasury to set up a dedicated unit to plug cash shortfalls. Manchester PFI has, however, come good and the banks are much keener to lend.

Construction professional views about recession.

The authors had brief conversations with various professionals of the UK construction industry while doing research works. The main question which were asked to these professionals was “do you think the financial crisis is affecting the UK construction industry”?

We had different answers but all of them resembled and showed signs of a decreased order book in their respective firms. Mr Vishal Beeharry, projects director at Skanska Building UK stated that all ongoing projects that the firm is working on have been approved at least 2 to 3 years ago. Due to the financial crisis, even an internationally recognised firm like Skanska has got its order book down. Some projects have been suspended until finance is available again but there are quite a few which are still going good.

Mr Girish Kumar Faugoo, working for Laing O'Rourke is of opinion that the company's order book has stayed constant since they have diversified in other fields which are in demand. Residential buildings have slowed down a bit as well as commercial properties but they have been getting some minor road and rail projects, compensating for the residential projects. Nonetheless, the firm has also decreased its number of employees by 10% for the last 18 months in order to manage their cash flow better.

Mr Jermaine Isaacs, working for the Nuttalls group was also of similar opinion. Although he stated that the company's order book was very much down as compared to the last 3 years, the company has been exploiting numerous fields which are in demand for example the rail sector. The company has acquired quite a few small projects which are compensating for major infrastructure ones.

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Chapter 5: Ways to tackle recession

As we have already seen from our analysis above, the construction industry has been undoubtedly affected from the recession. Some firms have been badly hit whereas some firms have only been touched, all depending on the size and measures adopted to tackle the recession from before. Most of the focus lately has been on the US economic stimulus package, which aims to pour billions of dollars into public works construction. Some firms will undoubtedly benefit from the stimulus package. Many more will not. For contractors in the latter grouping, all is not lost. This is the time to take a hard look at the business and see what can be done to climb out of that cave. While talking about this package in the US, some UK constructions firms, which have overseas branches will benefit as well. Nonetheless, the UK government is also contributing to booster construction works by adopting the PFI initiatives. But for the time being, those contractors who have been nearly shattered by the recession should take imminent actions in order to tackle the recession.

Just as important as the list of cost-cutting measures, though, is the way in which they are implemented. For some, asking employees to brainstorm cost-saving ideas, and then offering rewards to those whose ideas save the most money, will go over a lot better than implementing cost-cutting measures on which workers had no input. In addition, tightening the belt needs to be part of a larger exercise.

Now more than ever contractors are searching for ways to cut costs. How we go about cutting costs is just as important as where we look for those cuts. For example, too often the immediate reaction to the need for cutting costs is to eliminate positions.

Unfortunately, eliminating people usually means that the company will need to restructure its staff and sometimes good expertise is lost. This action is not always the best one, but if the company is not getting enough revenue to survive, then there is no other option. When contracts are obtained, the company can recruit necessary workforce again.

Another typical cost-cutting move is to investigate and evaluate costs like repairs and maintenance and lease hires. If unnecessary, these costs can be renegotiated with suppliers in order to get better deals. Insurance costs, interest payments, professional fees, salaries, fees from suppliers, taxes all need to be thoroughly assessed in a view to keep costs as low as possible.

When companies set cost-cutting objectives, they must consider long-term factors, such as the company's anticipated growth. Challenging, but realistic, goals must be set that take into account both internal and external limitations. For example, the capability of personnel, space and equipment limitations, and the timing of anticipated work must be considered.

Do more ourselves

Ultimately firms find that they can provide things at a cheaper price. For example, subcontractors buy plant kit and may charge a percentage on to the firm. But that firm can take that commission away by buying kit themselves, if depreciation is not too high and if the company needs that specific kit a lot. For example one 40,000 forklift truck will pay for it over three years, and will have a residual value of 20,000. So they can actually make a profit out of it.

Keep training

Some firms are using the quieter times to get people trained up. Operatives can be sent on training courses. This is in the hope that when the recession wanes the workforce will have an edge over competitors, win new business, and get a return on original investment.

Broaden the horizons

Diversification of the business and spreading the risk can be helpful. For example, underpinning and foundation firms could not only offer restricted access piling and subsidence work, but services in other insured perils, basements and the housing sector. Niches can be considered and cross-sell to other sectors such as local authorities. Major construction firms such as Skanska and Interserve are implementing this idea of exploring niche markets and moving to different regions across the globe where there is more work. This can compensate for loss of work in one region.

Chapter 6: Surviving the recession

All eyes are on the economy at the moment and no one seems to know how deep the recession will be or when stability will return.

As the situation becomes increasingly volatile, the authors believe that directors and managers can help their firms to survive and prosper by following the simple guidelines.

  1. Managing cash flow very carefully
  2. relationship with clients
  3. retaining a strong team and
  4. Maintaining a strong order book.

Managing cash flow very carefully

In this difficult period, the firm that manage their cash flow the best will undoubtedly survive best. Unnecessary costs can be cut and the best advice would be to spend wisely since revenue will be very scarce. As mentioned in chapter 5, only necessities will be required and all other costs can be assessed whether vital for the day to day running of the firm or not.

Relationship with clients

We should never stop listening to existing clients. They are the best source of revenue now and in the future. Even though it is easy to become sidetracked by what is going on inside the company, clients are also suffering and finding life tough.

Leaders and managers should make a commitment to see at least two clients a week and if they see none this week then see four clients next week. This idea must be kept up for six months and will start to see the benefit. There is a need to show how competitiveness can be improved and how risks can be managed.

Tough times call for tough action. This doesn't mean that we should weaken our business through indiscriminate cost-cutting but we must scale back the parts that are not profitable or show no potential. This means letting go of people who are underperforming. Be decisive but carry out this difficult task in a way that gives respect and dignity to the people who may have to leave.

At the same time, we must do whatever it takes to retain a committed team as these are the people who will help us weather the downturn. Regular and honest communication is essential. The true test of a leader is how we operate in difficult situations so now is a great opportunity for the leaders of the next decade to step forward.

Retaining a strong team

Maintaining a strong team of loyal subcontractors and suppliers is equally important. We should keep working closely with the suppliers that are willing to bust a gut to help us remain competitive and secure. Many house builders are asking for 15 to 20 per cent discounts from subcontractors and extending the payment terms. These requests are usually accompanied by the threat that this is what they need to do if they want to continue receiving orders. Those that are desperate enough to be giving those sorts of discounts will soon be out of business if they cannot reduce their own costs to enable them to squeeze out a small profit.

It is really important that we look after our best suppliers and work together to see how we can help them reduce their costs but still maintain a reasonable profit.

There is so much scope for eliminating unnecessary cost - such as by moving towards lean construction - to help us do it. The greatest gains can be achieved from eliminating waste, not by squeezing margins.

Future work

Everyone in the boardroom, the office and on site wants to know one thing - what is the next job? It is essential therefore that we retain our ability to win new contracts.

We should not be tempted into playing the numbers game and increasing the quantity of tenders we are submitting as we may spend too much, spread ourselves too thinly and dilute the quality and competitiveness of our tenders, which damages our conversion rate. We should hold our nerve and remain selective. Only bid for tenders where we know we have a great chance of winning. In addition we must eliminate the costly mistakes that most bidders make if we are to give ourselves a chance.

Failure to do this might prevent us from even passing the pre-qualification stage. One of the biggest mistakes is not taking the time to fully understand what clients really need and want.

We have to raise our game and make our bids really stand out from the crowd or pay the consequences. We owe it to our own team and our loyal group of suppliers to make sure that we do all that we can to win a steady stream of good quality contracts with good quality clients.

Finance

It seems incongruous to be writing about alternative procurement methods and fresh sources of funding so soon after the financial close of two major UK PPP deals, but they actually make these alternatives all the more urgent.

The M25 and Enni skill en hospital accounted for 756 million and 144 million of commercial debt respectively - removing 900 million from the project finance banking sector.

That's a lot of liquidity committed to just two projects by the few banks that can still lend in this market. And if we are to keep the PPP pipeline flowing funding and procurement innovation will be required.

An old procurement model - forward funding (FF) arrangements - could move key infrastructure projects forward, helping government achieve its goals and keeping the construction industry busy during recession.

The model was a common way for developers to fund projects when banks were unwilling to lend on transactions they considered risky. Nowadays, in an environment where banks lack money to lend, it should be dusted off to bring a new lender to the table.

In this model, pension funds buy a property from the developer and lease it out - essentially a rather topsy-turvy version of sale and lease-back with the developer not necessarily being one of the lease takers.

Future income is predictable if it is for a single occupier, but there's also room for speculation - in which both the developer and the pension fund can share the upside.

Simon Johnston at law firm CMS Cameron McKenna says pension funds would probably buy properties at the first stage so the transfer of title would take effect because of minimised stamp duty due to the price on the land paid on the day of value of the land rather than the built value of the land.

He says this would lead to something similar to a development management agreement where the developer would agree to develop it out, and the interim funding would come from the pension fund - a bit like a bank development facility.

This is similar to bank financing, but differs in that the pension fund ends up owning the property and the capital uplift is in its hands but - as with the past - this is open to negotiation on profit-sharing - overage agreements.

One thing that holds back investments in infrastructure is the slow procurement process - which could be resolved by a variation of the FF model.

In PPP markets the advantages include a pre-let agreement with a government agency and long-term stable cash flows - which pension funds have been comfortable with in the past.

If construction firms are keen to keep active, the forward funding model will be well received. However, the share of upside will remain a sticking point.

The drivers for PPP and Keynesian principles that we will work our way out of global recession by investing in infrastructure remain constant - and this is clearly one solution to make it work.

Pension funds are keen to invest in infrastructure; they recognise the underlying stability of asset-backed investments with concession-based income.

The trick is going to be in making these investments palatable to all involved.

If the cash-constrained banks can't fund them and bonds remain out of play, alternative sources of funding are essential.

Risk management in recession

Risk management is one of the hot topics in town. It has acquired a significant place in most of the professional carriers where organisations shed huge amount of money to put forward a risk management structure; which could filter down major risks that might creep into it. Many organisations have even a formed a risk management team; whose sole duty is to track down any adverse effects that can harm the projects and even the company. But the real question at the moment is whether construction companies are still allocating the required budget for risk management or they are foreseeing this aspect in construction in order to save pennies.

Although we know that we can try to reduce risk and uncertainty, but as Sir Michael Latham said in Constructing the Team report, ‘No construction project is risk free. Risk can be managed, minimised, shared, transferred or accepted. It cannot be ignored'.

This aspect need to be considered very thoroughly since there are undoubtedly some small and medium enterprises which are not sacrificing enough to minimise risks. As we have underlined in the introduction, companies are looking at cutting down costs, and the number of accidents on sites has now started to grow.

risk management cycle

Risk management is the activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks and risk management ensures that value is not eroded during construction. The above diagram shows the risk management cycle from risk identification up to reviewing the status of risks.

Risk Identification - categories of risk

Risks to construction projects can be grouped into 3 main headings.

  1. Those that affect the business of the organisation that commissions the project - Business Risks
  2. Those that affect the delivery of the project - Project Risks
  3. Those that affect the use of the facility that is being built - Operational Risks

Under each of these categories risks can be defined in relation to:

  • Health & Safety - of employees and the public
  • Operational - at business level, continuing demand, construction - performance of contractors and suppliers, ongoing operations - maintenance and life cycle replacement
  • Procedural - from failures of accountability, internal systems and controls, organization, fraud, etc.
  • Financial - from business failure, stock market, interest rates, unemployment, etc.
  • Technical - choice of technology - becomes obsolete, technical failure, etc.
  • Legal - risk associated with insurance, contracts, agreements and litigation

The management of risk is vital and it has never been so important before. Although some companies are trying to cut down cost, it can prove very profitable in the long run to sacrifice and put into practice a proper risk management plan in order to manage and minimize risks. This can also contribute in surviving this economic slump in a way. Efficient risk management would put all the operations at ease and utilize its funds in its best acceptable manner. All the activities should be delegated to those best able to manage it.

Challenges should never be confused with risks. There should be clear distinction between them. Ignorance would lead to failure, so as the old saying “Knowledge is power”, is everlasting.

Illustration with an example would clearly define how companies are tackling risks; especially business risks. There are lots of projects going on around us, but those bidding for it would make sure that they do all necessary steps to procure that bid, and whichever they feel not worth would be left of.

By utilising their expertise they would prepare estimates covering almost all issues, and there should be something that makes it different form the bunch. Innovation and expertise with knowledge would enhance the development of ultimate solution.

Those with right mix of things (cost, features, future returns, comfort, value, customer service) would secure the bid. All participants in the bid would be well prepared to bring in to their advantage. The latest news of bid rigging is not at all a good practice, and it could destroy the reputation of the company.

Those taking the right risks in this recession would come out as successful players, for they posses a good risk management capability backed by a good team. Drying up of funds would be a major issue at this time and maintaining a good cash flow, through a secure financial institution could support the team throughout. PFI contracts are a great way to secure government backed projects. PFI deals would buoy our industry in this torrential economic downpour. Companies should utilise all means necessary to secure such projects for it is a lifesaver.

Reduction of workforce should be deployed as a last resort; otherwise it is not a good risk management practice. Once companies lose their expertise they also lose their strength and would have to pour in double the effort to bring back that lost ability.

Sustainability

Extensive surveys of main sites can find ways which firms can reduce their carbon footprint, waste and energy use. Energy-saving technologies can be introduced in order to eliminate, reduce and recycle waste. As a result firms can make annual savings of over 50,000 on an initial investment of only 25,000.

There have been at least 50,000 job losses in the construction products industry in the last year, and we expect further reductions. That's between 7.5% and 8% of the estimated total workforce. But the majority of these losses have been on the heavy side of the industry. There's no evidence to suggest people are abandoning sustainable products. There may be a slowdown in research as markets drop, but people realise this is where they have to be when the market picks up.

This sentiment is echoed by Cal Bailey, director of sustainability at NG Bailey. “Sustainability has been on a sharply rising trend over the past few years, outgrowing the rest of the industry. Now the industry is slowing down there is some decline in volume, but this isn't something that's affecting sustainability in particular, and indeed in certain areas it's still rising.”

UK Green Building Council

The UK Green Building Council certainly hasn't seen any major dip in enthusiasm or membership. Membership renewals, which are a good barometer, are very close to 100%, and they have also had new members in 2009.

One reason for this is a desire for companies to make themselves distinct from their competitors in a tough market. “I'm seeing a lot more investment in terms of time by senior people looking at how to develop new products and ways of doing things,” says Ian Gatenby, director of Balfour Beatty Geo Environmental. “This is partly to be able to differentiate from competitors, and partly because there's now a bit more time spent by clients scrutinising the procurement process.”

The client that pays most attention to sustainability criteria is the Government. Bailey points to its Building Schools for the Future programme as a case in point. “Government rhetoric on quality is not always matched by the money it spends, but it is now having some impact, and we're definitely getting a better audience for better quality solutions.”

Tony Hyde, managing director of Thomas Vale Construction, agrees. “Pretty well every public sector job has some degree of sustainability as a prerequisite, now.”

The private sector, on the other hand, has struggled in the past 12 months. “There's maybe 10% to 20% of clients that have it firmly on the agenda, but the rest are still very nave,” says Hyde.

Over-estimating costs

The most obvious naivety comes in the over-estimation of initial costs for sustainable building. It's about having trust. Still many clients must now be reverting to the cheapest option rather than being prepared to state a budget in advance.

“The Sustainable Development Commission conducted a study into the 20 biggest changes in the environmental performance of products, and there wasn't a single example where they were driven by consumer behaviour,” says John Tebbit, industry affairs director at the Construction Products Association. “They were all to do with regulation or corporate policy.”

This perhaps explains the perennial slowness of the commercial property market to adapt to change. “The landlord-tenant relationship is often a drag on progress,” acknowledges Bailey. “The fact the long-term benefit doesn't come back directly to the person paying the higher up-front cost.”

In this context, even the desperate delay in the Government's acknowledgement that it has to deal with the country's existing building stock cannot dilute the importance of Ed Miliband's plans for the Great British Refurb.

Nevertheless, even in the private sector there are signs that change is afoot. “We have clients even now, admittedly owner occupiers that are looking for innovative, sustainable buildings” Bailey insists.

Change in mindset

Even if awareness is far from universal, however, there is evidence that the final element in sustainability's ability to resist the impact of the recession comes down to nothing more tangible than a widespread change in mindset within the industry.

Thinking about sustainability has become a lot more intuitive over the past few years. It's not just related to cost savings. Sustainability is not now generally seen as something different - people don't have sustainable and unsustainable ranges, it's just a part of their job as a producer. In fact it would now seem counter-intuitive to standstill with regard to the lessons that have been learnt about sustainability.

It would be a shame if all this gets forgotten when things improve and speed again becomes imperative. When things are very busy it can be quite difficult to make yourself heard. It might be easier for the costs associated with new products or techniques to be absorbed, but they could also have an impact on the programme, and you can't give a hand on heart assurance that it won't for a product that's not been taken on.

Chapter 7: Conclusion

According to research carried out by the authors, orders in the three months to June 2009 rose by 18 per cent compared with the previous three month period. Orders in the 12 months to June 2009 fell 27 per cent compared with the previous 12 months. In the three months to June 2009 compared with the same period a year earlier, private housing orders fell by 33 per cent and public and housing association housing orders fell by 19 per cent. All orders figures quoted are seasonally adjusted and in constant (2005) prices.

This clearly shows that the recession has badly affected the UK construction industry. But there are always means of avoiding the full effects of it and ways of moving forward as discussed in the above chapters.

To conclude this dissertation, we, authors have utilised our best knowledge to demonstrate our understanding in real simple terms on the efficient ways that UK firms can survive the current financial crisis in the construction industry. We truly believe that our vast analysis on five of UK's top contractors and our market research with few construction professionals have brought forward in numerous solutions as stated above. As a summary, the following survival tips could be pretty useful.

Optimistic approach would initiate the right actions necessary to survive any economic downturn, regardless of its origin and impacts. We should not shy-away from risk. It is an inseparable part of entrepreneurship and innovation, required to survive this turmoil. One best thing to identify the onset of such a crisis is to go back to our history. It carries the trail of the past recessions, the burden and sufferings it carried along, reasons that triggered it and so on. By analyzing the response each government had initiated and its effectiveness, we could develop better alarming measures and solutions. Our industry which forms major part of any GDP, used to dip first and revive late. This characteristic makes it more vulnerable, than any other industry. Thus prudent precautionary measure for close monitoring technologies should be developed.

We know our foot is wet, so the next best thing is to come out of it. How to achieve this has been the ‘holy grail' for us, and now we have zeroed on to few best options, even though this weak economy has downsized our strategic options.

Funding

Companies should be creative while sourcing funding., using various schemes in tandem to suit a business, such as: financing a debtor book and stock ledger, asset or trade finance; entering into hire purchase arrangements; selling shares to managers or key employees; seeking an external investor; restructuring or maximising tax efficiencies to create a cash flow advantage. Once the firm know their potential, and where to' knock the door', they could obtain the capital required to meet their business objectives.

SME's should be well aware of the government initiatives to make avail of the funding, or simply ‘exploring the various options available'. The key to funding is access to a good network of contacts. This brings the possibility of being prepared to negotiate with the banks or even switch provider and understanding what investors want to see.

In-order to boost the construction industry banks have to loosen their lending terms, and start lending generously through optimum credit worth checks. Strangling the borrowers cannot bring light at the end of the tunnel. This little fuel could kick start our whole economy, and function more efficiently than before. As we all say, experience is the best teacher. Lessons learned should be carried along, never to fall again. It is our responsibility to make the government understand the importance of funding, through demonstrating the value it creates in-terms of employment, contribution to GDP, progress etc.

All our suggestions coupled with wise thinking, could eradicate the current plight of our industry, and boost its worth to become the top GDP contributor.

Diversification

Adopting this means could significantly reduce the impact of recession. The more diverse firms become the more chances they have to win varied works. Success lies with those, who could tackle varying issues and are preferred over others. This in other words means that firms can concentrate more on different fields which have been less affected by the recession. Their varying expertise would mean that work will be nearly guaranteed most of the time.

Restructuring

This could bring significant changes to the cash flow of companies and how things are managed. Proper restructuring could improve performance with fewer outlays, and if dealt carefully could sort out all major issues. Budget allocation with close monitoring could determine the leak, and fixing it would save penny.

Expansion

Companies should try to expand to other regions, in-order to improve the scope of success. Identifying places with fewer infrastructures could be a place to start, and government initiative could bring in long-terms works. This is a good strategy from UK's major construction firms like Interserve plc and Skanska who have opened branches in several countries in Europe rather than sticking on to their birthplaces.

Collaboration

Close collaboration with suppliers and clients is a must to survive this recession. Best deals should be negotiated and long term relationship should be established. Firms should respect their clients and clients' suggestions should be given due care.

Any cost reduction measures available should be passed on to them as well. Their difficulties should be accounted and acted on mutual consent. Good relationships would retain suppliers and clients. There is also possibility of referrals from existing clients, there-by fetching firms themselves more work.

Risk management

Frontline deployment of a risk management team is a must to tackle any unprecedented issues. Risks could bring unnecessary costs with it. Any failures could ruin the reputation of the company, and thereby sanctions preventing them from their undertaking. Both quantitative and qualitative methods of risk management should be well utilised.

Construction marketing strategy

How to market a product is at the forefront of every business. Getting contracts during this crisis is not that easy too. The more vigilant and pro-active the companies are the more chances of success lie ahead. For example most important assets for a contractor right now might be the creation of a website, giving details of all expertise of the company. About 90% of business comes from phone calls, numbers traced out from internet. Websites should not only be attractive and professional, but one which facilitates to answer customer queries and providing relevant information is a must. Sales call is a marketing strategy that could be best utilised, to acquire works. Whoever is best in satisfying the triple constraints (i.e. time, cost and quality) they are highly likely to win the work. Fresh and renewed marketing strategies coupled with innovation could bring out formulas to tackle this crisis.

Cash

The authors also believe that cash is another ultimate solution for any project, specially during this financial crisis period. For any construction project to materialise we need finance and if the finance is in cash, then we have an upper hand since we do not need lenders for money. Without money, projects remain on the drawing board. This system works in two ways; if the client has cash to finance projects; the then situation is good for the contractor. If we take this idea the other way round, if the contractor or the construction firm has got some cash money, then they can offer the client better payment facilities in order to secure the bid. This means that the construction firm is taking the majority of risks for securing bids by utilising its own finance initially. Reserves or savings is said to be the best form of project financing. Those individuals or companies holding this valuable asset could easily attract contracts, for the guarantee it offers. This money they hold makes them highly reliable. Clients prefer taking the least risk and those construction firms having funds is the best to approach. Pension funds are such an example. Construction companies prefer to offer them best bids because of their reliability on payments. This is a good manner to receive best value for money. Similarly companies with good liquidity ratio will always gain preference.

Financial problem is considered to be the worst form of crisis for any project. It should be given away to those best able to manage it. Banks would lend money only to those with good credit worth, or to those capable of showing collateral security worth the borrowing. There is always an interest charge associated with borrowing. This would account as a major outlay for any projects. Evading this expense through reserves could save a lot of money, and keeps the firm safe.

The authors of this dissertation would recommend this as the best available option. Construction firms should seek other alternatives, if unable to raise funds of their own. If the firm is cash rich, they could customise their payments as and when required depending on project delivery. Projects could be completed quickly, if funds are readily available.

This could dramatically reduce the unexpected costs due to material price fluctuations, climate variations and other political causes simply termed as Force Majeure.

Thus the companies involved in major projects, would be required to hold an efficient financial management system. This clearly illustrates the importance of monitoring cash flow. The amount of money being spent is analysed against the IRR (Internal rate of return), All necessary actions deemed necessary to maximise this IRR is taken by the management committee. Prompt payment at designated intervals could keep the output aligned to expectations. Scarcity of funds could damage the project, by marginalising the expected return.

References and Bibliography

  1. Roots of recession:
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  2. List of recessions in the United Kingdom
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Text books

  1. ‘The Credit crunch' by Graham Turner.
  2. Financing infrastructure projects By Tony Merna, Cyrus Njiru.
  3. Principles of Project and Infrastructure Finance By Willie Tan.
  4. Interpreting company reports and accountsBy Geoffrey Andrew Holmes, Alan Sugden, Paul Gee
  5. Financial analysis: tools and techniques : a guide for managers by Erich A. Helfert
  6. An introduction to engineering economics By Institution of Civil Engineers
  7. Risk management and construction By Roger Flanagan &George Norman.
  8. Management of construction by F.LAWRENCE BENNETT.

Article

  1. What makes a PPP effective for Government? (A private sector perspective)

Journal Papers

  1. Goodier, C., Soetanto, R., Dainty, A., Austin, S., Price, A., and Harty, C., (2007) A competitive future for UK construction?, Construction Information Quarterly, 9(4), 169-174.
  2. Green, S.D., Harty, C.F., Elmualim, A.A., Larsen, G.D., and Kao, C.C. (2008) On the discourse of construction competitiveness, Building Research & Information, 36(5), 426-435. ISSN 0961-3218.
  3. Green, S.D., Larsen, G.D., and Kao, C.C. (2008) Competitive strategy revisited: contested concepts and dynamic capabilities, Construction Management and Economics, 26(1), 63-78. ISSN 0144-6193.
  4. Goodier, C.I. (2006), Sustained competitiveness in UK construction: a fresh perspective, Innovation & Research Focus, issue 65, p6, May 2006.

Official Report

  1. Fleming A. and Gilkinson N. (2007) System Dynamics as an aid to Rehearsing Strategy - Strategic Planning in Construction