Fixed price contracts for Olympics could cause construction cash flow problems

[Fiona]

Construction companies tendering for Olympic contracts could face a significant cash flow squeeze, according to global credit insurer, Atradius. Recent announcements from the London Development Agency, responsible for organising the tenders for Olympic construction contracts, have indicated that contracts for Olympic construction work are likely to be issued as “lump sum” or fixed rate deals.

Atradius is warning construction companies to be wary of cutting margins too fine: costs of materials and labour are still increasing. Inflationary pressures now emerging may create more difficulties for pricing contracts so far in advance. According to research conducted by Atradius last year, the trend in the construction industry is towards cutting margins on contracts to win business in the hope that the companies can claw back some income on maintenance and servicing work.

Any problems encountered by the construction companies are likely to have an immediate knock-on effect on their sub-contractors.

Mike Weaving, Senior Underwriter at Atradius, commented: “This is a volatile sector at the best of times: construction projects are highly correlated to the general economic environment. Construction companies should have the confidence to be more robust in their pricing for big ticket Olympic jobs and should take out good credit protection. As far as sub-contractors are concerned, they need to ensure they have accurate and current financial intelligence on the companies for whom they work. They should also consider overhauling their credit management systems and consider some form of credit insurance to protect them when their radar fails.”

Many companies still see credit insurance as a last resort. In difficult times, it is clearly advisable to protect trade as early as possible, so the credit insurer knows and understands the strengths and foibles of the individual business and the industry, working with their clients to support trade as safely as possible.

A current, high-profile example of the risks highlighted by Atradius is Multiplex, the construction company responsible for the Wembley Stadium contract. The company’s woes are well documented and it has had to make provision for estimated losses as high as $170 million. However, Atradius is continuing to offer its clients cover on Multiplex, as it remains fundamentally a strong company, whereas other credit insurers are refusing. Atradius feels that it is in no-one’s interest to pull cover at this stage and compound the losses suffered by the company, and that with continued support allowing their suppliers to provide materials, they will be able to survive this crisis.

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