March 12, 2018 by David Bowcott
There is no doubt about it, the construction industry has globalized quite significantly over the past 20 years and there are both advantages and disadvantages to the world’s biggest players creating a global service footprint.
Not to be a downer, but I’m going to focus some attention on one of the potential disadvantages of living in a world with globalized construction and that is the fact that contractions in construction capacity felt at a global level lead to contractions in those local economies that are significantly exposed to global players. Regardless of the role you play within the construction economy and the relative size of that role (small, medium or large), you will be exposed to the colds and flus suffered by the mega global players.
All players, at all levels, should be paying attention to trends/symptoms like those referenced.
Let’s look at some of the recent symptoms at a global level that might indicate that global construction capacity might be coming down with a pretty nasty illness. The following represents a very small sampling of several trends we are seeing that exhibit symptoms of this illness:
1. Growing Number of Global Contractor Failures: Over the past five years the global construction market has seen some of its biggest players fail. With less than two months of 2018 in the books (as of this writing) we have seen the insolvencies of Carillion PLC and Società Italiana per Condotte d’Acqua S.p.A (or Condotte) out of Italy. We also witnessed several other high profile global contractor financial collapses/restructurings since 2015. Of note, almost all of these large contractors had significant operations outside of their home country (they were global players).
2. Evidence of Weakening Global Contractor Financial Positions: Several contractors in the global community continue to experience weakening profit margins in the construction sector. The table below provides historical evidence of margin deterioration in one of the world’s largest construction economies – the United Kingdom.
The UK construction market is extremely transparent and this information has been gathered from public records. Such weakness isn’t exclusive to the UK market as other markets are experiencing similar margin deterioration. Thinner margins leaves less room for error and can often leave contractors with insufficient resources when demand for their services and associated security increases. Less profit also means balance sheet and liquidity weakness over time, leading to cash flow concerns and the inability to finance operations in event of project or marketplace disruptions.
3. Dispute Data: Every key region within the global construction economy monitors disputes between key players within the construction supply chain in some form or another. The chart on Pg. 44 was derived from data drawn from Arcadis’ Global Construction Dispute Report.
Though there appears to be a reduction in disputes in 2016, the view through my company’s global lens shows evidence that the 2017 disputes are significant and we expect to see an overall upward jump in this trend line. Clearly, up to 2016, there does appear to be an upward trend in dollar values for disputes and duration of disputes.
These disputes do have an impact on contractors’, subcontractors’ and suppliers’ balance sheets. The inability to turn underbillings/receivables into cash in a timely manner will have significant impact on a contractor’s ability to finance future obligations, or finance their way out of a project problem or marketplace disruption.
These are but three examples of symptoms found within the global construction economy that point to a potential illness within the overall market. All players, at all levels, should be paying attention to trends/symptoms like those referenced above because the world is in fact globalized when it comes to construction capacity.
The global supply chain is interlinked now and as it becomes more interlinked global disruptions will affect those economies that have the most exposure to global players – like Canada. In addition to paying attention to global trends/symptoms, you should ensure you are doing all you can to prepare yourself to best navigate financial turbulence caused by a global construction capacity contraction. (Turbulence might be defined as: (a) a reduction in surety and bank credit capacity; (b) loss of balance sheet liquidity; (c) increase in claims preparation/claims defense; and (d) overall inability to bid the work you would otherwise want to bid in the coming months and years.) Hope for the best and prepare for the worse.