Guest blogger Michael Gerard’s advice to help companies brave the recession.
For some “on-the-ball” companies, this will mean business as usual – but those companies lulled into a false sense of security (and lax business practices) during the last 15 years of economic growth will need to seriously reconsider their ways of doing business. By its very nature, our economy will always will be cyclical; the only uncertainty being the length and depth of the peaks and troughs of a cycle. This means that the best way to grow and thrive in any environment is to adopt best practice techniques – regardless of the prevailing economic climate. You may not need to do things very differently, but you will need to do them better.
Minimise the hazards
Now is not the time to take risks. As a business allied to the construction industry, your first priority is putting a clear contract in place. It sounds pretty obvious, but it is surprisingly common, even amongst companies responsible for delivering multi-million pound projects, for managers to be unclear on what their company has actually contracted for in terms of timing, payment periods, rights of set-off, insurances and damages.
It is also crucial to ensure that the main terms and conditions of contract are agreed and clearly understood, and that the documents referred to are in fact those that the agreed price was based on. I would advise using an industry standard form of contract as these are not only industry tested, but also make it much easier to be alerted to changes such as contractual set-off and ‘time is of the essence’ clauses.
Money makes the world go round
Smaller businesses are particularly vulnerable to problems with cash flow – an issue that inevitably becomes more common as a recession deepens. Be alert to this threat and take measures to guard against tardy creditors.
• Ensure quicker payment by offering attractive incentives such as discounts for early settlement.
• Always run a credit check on the client before entering into a contract. If the client is a regular customer, carry out periodic credit checks and never trade above the credit limit that you feel is appropriate.
• Consider introducing special terms in the contract such as retention of title (commonly referred to in legal circles as the Romalpa clause), and interest on late payment.
It is the money in the bank that determines a company’s success, so no matter how attractive a potential contract may look in regards to turnover or profit, make sure that the payment terms are clear and binding: these are critical in the company’s trading position and financial solvency.
If you are experiencing major problems in securing payment, use self-help remedies such as the traditional ‘letter before action’ and statutory demands where the sum is not disputed before taking the more complex, and expensive, legal route.
Where the debtor disputes the sum claimed, there is the option of legal action, but court disputes can be long and expensive and there is no guarantee that your debtor will still be trading by the time of the hearing. Therefore, consider including other forms of dispute resolution in your terms like adjudication, the decision of which can be made binding.
Look long term
You may be most concerned with survival in the here and now, but it pays to look to the future, whatever the economic conditions. Even in more prosperous times it pays to aim for breadth and depth in your client portfolio; working exclusively with one client or within one specific sector makes your company very vulnerable. If possible, work with a range of clients in different industries, to maintain your independence and reduce risk.
You may have created a niche market for your business, but if that market collapses, your reputation is unlikely to save you, so consider diversifying. Just because you have always done something a specific way or worked within a particular marketplace doesn’t mean that is the way that it always has to be. Take advantage of lean times to diversify: think out of the box and find other markets for your product or service.
Invest for success
It’s natural – and sensible – to look for areas where savings can be made, but beware of false economy. By all means review company expenditure and cut down on the luxuries, but remember that the easy option is not always the best. Marketing budgets are often the first to go. However, I would argue that in a recession, marketing is more important than ever: use your marketing budget to communicate with current and potential clients. If nobody knows about you, how can you expect to win their custom?
As spring brings finer weather, it also brings some hopes of recovery. However, it is important to remember that this is just the start of a very long journey. Conditions are still harsh for the construction industry, but the problems are not insurmountable. Stick to the principles and procedures of good practice, hold your nerve and review and build on what you are doing right. There is some light at the end of the current economic tunnel, so resist change for its own sake. Change what doesn’t work and do more of what does and your company will be in a strong position to survive – and maybe even thrive – throughout the recession.
Michael Gerard is a barrister, chartered builder, registered adjudicator and accredited expert in quantum and planning matters. He is also the Managing Director of Michael Gerard & Co (www.michael-gerard.co.uk), a company of chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.
