Guest Blog - Cashflow Considerations post Covid-19 and Supply Chain Protection Mechanisms

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What is this week's blog about?

In this week’s guest blog, Alexandra Dorling MRICS, Senior MEP Cost Consultant at CBRE and Consultant at Property Elite, takes a look at cashflow considerations post Covid-19 and supply chain protection mechanisms that could be implemented.

Essential reading for RICS APC and AssocRICS candidates on various pathways, including Quantity Surveying, Building Surveying and Project Management.

However, all candidates need to be aware of the impact of Covid-19 on the property and construction industries, so wider knowledge will set you in good stead for your final assessment interview.

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What is the current position?

Following the UK’s official lockdown since 23rd March 2020, we are beginning to see restrictions being lifted over a number of industries and life is beginning to return to a “new normal”.

As the UK economy re-opens, we are witnessing the fallout and negative economic effects that the Covid-19 outbreak has had on the UK.

Over the past couple of weeks, we have seen reports within the construction industry media detailing the start of mass redundancies, consultancy firms entering liquidation and depletion of contractors’ cash reserves.

In Construction Enquirer industry surveys and within ONS analysis, it has been reported that contracting firms have an average of between 1-3 months cash remaining. As a result of this, it is predicted that 11% of the workforce will be cut by September 2020.

What is the role of the surveyor?

The role of the Quantity Surveyor on projects over the coming months will, therefore, become ever more important, both from client and contracting perspectives. Both sides will need to work together to strike a fair balance between safeguarding the client’s commercial interests and maintaining positive cashflow within the supply chain.

What supply chain protection mechanisms could be used?

There are a number of measures which could be considered and put in place to strike a fair and reasonable balance between the parties, such as advance payments, revised cashflow forecasts and renegotiation of payment terms.

As mentioned above, contracting firms are reported to have much lower cash reserves than normal. As such, the ability to make advanced payments for plant and materials may now become an issue. Generally, standard forms of contract allow for advanced payments for materials on the basis that the relevant paperwork such as Vesting Certificates are provided. However, some clients can seek to amend these terms in order to protect their liabilities.

Additionally, where contracts are agreed using Activity Schedules, payments are not due until the works are 100% complete. In the current climate, these types of terms may begin to prove inhibitive to projects and result in a further slowdown of works.

How can surveyors, contractors and the supply chain work together?

Working with contractors and the supply chain to determine any potential financial strains on projects will prove beneficial to all involved. This will allow both sides to have an understanding of project pinch points and potential next steps to overcome challenges as a team.

How can client side and contracting quantity surveyors work together?

As part of these discussions, the client side QS and contracting QS should work together to assess upcoming project milestones, drop dead dates for procurement of plant and materials and any manufacturer payment dates.

By understanding when cash is due out, and therefore, required in, the two representatives could determine whether or not amendment of payment terms and valuation dates will be required.

For example, if the contract states monthly valuations, but in the interim bi-weekly would be beneficial, this could be considered. Or, if advanced payments were written out of the contract at execution, it could be negotiated amongst the parties that these terms are reintroduced.

If it is determined that the advanced payment terms are to be revised, the client side QS should ensure that appropriate securities are put in place, such as Vesting Certificates and/or Advanced Payment Bonds. Although Advanced Payment Bonds are rare as they come at a financial cost, it is an option to be explored where necessary.

A further consideration in relation to payment terms is the holding of retention. Some parts of the industry such as infrastructure are moving away from the holding of retention in its entirety to assist in cashflow for the supply chain. An analysis of the health and key pinch points within the supply may conclude that the lifting of retention percentages could be beneficial. This could provide a small amount of assistance that the supply chain needs to remain in a positive cashflow.

In uncertain economic times, the industry needs to work together and understand the pressures felt by both sides. This will allow quantity surveyors and other surveying professionals to identify and advise on the most mutually beneficial solutions to the issues we will all now be facing.

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N.b. Nothing in this article constitutes legal, professional or financial advice.