Supply chain management in the construction industry – avoid issues by focusing on best practice
Supply chain management in the construction industry – avoid issues by focusing on best practice
The construction sector has faced significant challenges in recent months, becoming one of the industries most affected by supply chain disruptions and economic volatility. Insolvency rates have surged to around 450 per month, affecting major players like Buckingham Group, MJ Lonsdale, Henry Construction Group, and the recent collapse of ISG. These failures have raised concerns about the resilience of supply chains across the industry, with potential further disruptions on the horizon. So how should construction businesses manage their supply chains to reduce risk?
Supply Chain Resilience: What are the Best Practices for Construction Firms?
To mitigate risks and enhance supply chain resilience, construction companies can adopt several strategies.
Deep Due Diligence: Financial checks alone aren’t enough. You should consider geopolitical factors, over-reliance on key customers, and media risks to avoid disruptions. Understanding what your suppliers’ risk factors are, coupled with ongoing monitoring is key to creating robust due diligence of your business-critical suppliers.
Contract Value ‘Leakage’: Reviewing high-risk, high-value contracts can reduce your cash loss. According to World Commerce & Contracting, 8.6% of contract value is lost across supplier portfolios. In a tight margin business like construction, reviewing high risk, high value contracts can help you to release cash back into your business through a combination of retrospective overbilling recoveries and future cost savings.
Cash Flow Management: Understanding your suppliers' cash flow is critical. Red flags include rising trade creditors and debtors, which can indicate financial instability. Request up-to-date financial statements regularly to make sure your suppliers are stable. Supplier Contingency Plans: Post-contract award is often where the greatest vulnerabilities emerge. Changes in company ownership, shifts in risk tolerance, or the acquisition of a previously agile supplier by a larger conglomerate can lead to a decline in service quality and disruptions in supply continuity. To mitigate these risks, conduct regular contract and supplier audits to evaluate your suppliers’ performance, cost-effectiveness, and compliance.
Supplier Financial Stability: It’s important to understand your supplier's revenue dependence on your business. For sole suppliers, conducting annual financial due diligence is essential. Consider strategies like taking an equity stake in your supplier or improving payment terms to support their cash flow.
Payment Practices: Evaluate how your suppliers manage payments down their supply chain. Poor payment terms, like Carillion’s practice of 120-240 day payments, are unsustainable.
Collaboration on Risk: Explore collaborative contracting approaches that share risk and reward among stakeholders. This can be especially beneficial with government clients who may be more open to innovative risk-sharing methods.
Prepare for Upcoming Tax Changes: With the Budget on 30 October 2024, it's crucial to assess how potential tax changes could affect both your business and your supply chain. Stay informed and plan for adjustments to minimize disruptions.
Ensure Compliance Across Your Supply Chain: Under the Corporate Criminal Offence (CCO) and Senior Accounting Officer (SAO) regimes, large contractors are responsible for ensuring tax compliance throughout their entire supply chain. This means that your internal risk and compliance teams to stay vigilant, as non-compliance can lead to serious consequences.
Evaluate Your Supply Chain’s Reliance on R&D Tax Credits: If your suppliers rely on R&D tax credits, assess how recent regulatory changes and rate increases affect their profitability. If a company is not considered a going concern, they will no longer be eligible for R&D tax credits, so it is fundamental that your partners are financially stable without reliance on such incentives.
Research & Development Expenditure Credit (RDEC): Merged Scheme Changes affecting R&D across Supply Chains
HMRC is placing more responsibility with Tier 1 contractors for enforcing key supply chain tax issues extending reporting requirements from traditional areas such as CIS, IR35 and VAT to R&D.
HMRC have overhauled the R&D rules to try and improve the effectiveness of the relief after it estimated Fraud and Error of £1.13 billion. The construction sector was identified as the least-compliant sector, with only 38% of claims estimated to be compliant. This low compliance has led to significant scrutiny by HMRC, with 1 in 5 claims now subject to review and more recently even arrests at unregulated firms offering R&D tax advice.
The overhaul of R&D rules benefits larger companies, with the RDEC rate increasing from 13% to 20%. However, from accounting periods starting on or after 1 April 2024, new contracting-out rules take effect. Under these rules, companies will need to reassess who claims the R&D credit—themselves, their supplier, or their customer: there are rules prevent both parties from claiming the same costs. Although this can allow large businesses to claim subcontracting costs for the first time, it also creates risks. In many cases it is likely that Tier 1 contractors will be able to claim R&D in contracts where the R&D was previously claimed at Tier 2, 3 or lower levels, but supplying all the information to enable valid claim will need to be built into contracts.
Mapping the supply chain for compliance could be a challenge. To safeguard your future claims, you should review your contracting and procurement processes now to ensure compliance and seek regulated advice to protect your R&D claims. The construction sector faces ongoing challenges, from supply chain disruptions to skills shortages and rising insolvencies. However, opportunities for growth remain if firms can adapt by implementing robust risk management practices, building resilient supply chains, and ensuring compliance with evolving regulations like RDEC. Our construction experts can help you leverage these strategies to navigate the uncertainties ahead.