2018 Construction & Surety Outlook

2018 Construction & Surety Outlook

2018 Construction & Surety Outlook

Looking back at the boom and subsequent bust in our economy over the last 8-10 years, we can feel somewhat relieved that things are definitely improving particularly in the construction sector with Ulster Banks PMI for the sector at a high of 61.4 in January up from 58 in December, which indicates continued expansion.

The down side is that the majority of construction projects are in the greater Dublin area this includes Wicklow and Kildare but barring Cork have not filtered out into the wider economy. The commercial sector is leading construction due to expenditure on Foreign Direct Investment projects and by renewed activity in the commercial office sector due to rapidly rising rental levels. The residential sector lags behind, onerous planning conditions, the tight lending environment, high levels of indebtedness amongst developers and the cost of construction still placing downward pressure on this sector. The required volume of 35,000 units per annum or more are far from being met with around 9,000 units being completed in 2017, there is still massive scope for growth.

The outlook for 2018 is positive, residential will continue to see steady growth due to ongoing pent-up demand, developers are scaling up gradually and there are improvements in large scale planning processes. Developers are still not in for an easy ride as access to finance remains an issue, the increase cost of goods and labour with labour supply also becoming an issue. The office market is still increasing at a rapid rate which is positive as there is still strong demand from current Foreign Direct Investors as well as uncertainty around Brexit and we will need more office space to meet the potential influx of foreign companies who will need to relocate their operations in order to avoid being denied access to the European Unions single market.

While uncertainty remains high, it is too early to know what the impact of Brexit will be in the medium too long-term for the Irish construction industry but we cannot wait to find out we need to be proactive and we should all be looking for some joined-up thinking in relation to planning, funding and development in the sector. The National Development Plan 2040 with a potential spend of €115 billion during this period could put some certainty back into the construction market for the long-term.

On the bonding side which is mirroring the general construction market there has been a rapid improvement in the availability of capacity provided by surety’s in the past 12 to 18 months this is due to a number of new entrants and the expansion of existing providers, the surety outlook for 2018 will remain positive but surety’s will be cautious and underwriters may be more conservative in their risk assessment due to the failure of a number of contractors both in the UK and Ireland, the most well-known being Carillion, a number of UK surety’s are taking big losses.

The impact of Carillion’s failure is still to be felt on the sub-contractor side as non-payment for work carried out or goods supplied starts to impact cash flow.

Going forward in 2018 surety’s will want to see that astute contractors have not abandoned the lessons learned in the recent post-recession recovery and firms remain leaner and meaner with a focus on bottom-line results, then their ability to obtain bonds and facilities should remain positive, an overall acceptable profit margin for efforts expended is mandatory.

Today’s cash strapped public and private owners are shifting greater risk onto contractors through onerous contract terms with non-traditional project responsibilities. The evolution of project delivery systems has surpassed design-build projects to more challenging methods of integrated project delivery (IPD), gap financing and PPP’s. In these high-breed risk-sharing approaches, attention to the potential expanded and long-term exposures to risk must be identified and addressed. Contractors must be alert to new risks, resist these new risks whenever possible, and keep costs low to stay profitable. The financial consequences of the risk-shifting can hit general contractors and subcontractors hard, prime example again being “Carillion’s Inspired Spaces Consortium”. Subcontractors first feel the financial squeeze since they have to cash flow their own work and are the furthest from the project funds. Long drawn out litigation disputes are costly to all parties from direct and in-direct costs that strip away the already thin project profit margins.

In order to be successful in the future, contractors need to focus on what they know best – their core competencies, they need to highly discriminate on project selection. New opportunities need to have an acceptable profit margin to risk exposure. Avoidance of unknown project elements, contract terms, partnerships and problematic owners should all be traded for the best opportunity projects that have a high probability to make money and generate positive cash flow. Technology needs to be mastered and leveraged at all aspects of a company to maximize efficiencies and productivity. Collaboration, communication and driving ‘best practices’ across all operations will bring improved ways to equally improved results. By trading in revenue growth goals for a keen eye on exploiting high margin projects with low risk factors, contractors can realize the long term sustainable business model of simply growing profits.

Surety Bonds is Ireland’s only specialist surety & bonds intermediary. The company was set up in 2012 to specialise solely in bonding, to introduce new markets for clients and to become a leading authority in bonding in Ireland. As surety specialists we represent a large selection of sureties (insurance companies who provide bonds) and the real benefit to the client is that they have access to them all, we help to fit our client and the needs of their principal with the right surety provider.

{This article was written by Colm McGrath, MD Surety Bonds and originally appeared in Irish Building Magazine}