Contractors hit by slow payment

By Stanley Pignal
Published: Jun 20, 2008

Construction subcontractors are complaining of unpaid bills ahead of housebuilders' end-of-year close, as debt-laden developers pull all the levers to flatter their balance sheets.

The aim, privately admitted by many builders, is to preserve as much cash as possible on the day the auditors go through the books, in an attempt to relieve worried investors and avoid breaching debt covenants.

"All invoices will be paid but some not as quickly as a year ago," one FTSE 250 builder said. "That's just the sort of sensible cash management you'd expect to see at this stage in the cycle."

The practice of delaying invoice payments at this time of year is "nearly tradition", one subcontractor says. The move has forced his roofing operation to renegotiate payment terms up its own supply chain.

Subcontractors are still upset about the decision by many builders this year to impose discounts of 3-5 per cent unilaterally on ongoing contracts. With the development of new sites delayed by builders and jobs being cut, subcontractors are careful about their response.

"The message we're getting from members is that payments have just stopped. Nothing is being paid," says Suzannah Nicol of the National Specialist Contractor Confederation. "It's not fair, but it's nothing new, either."

The two companies most often cited are Taylor Wimpey and Barratt Developments, both of which are seen by analysts as most likely to break banking covenants because of the high levels of debt they had coming into the downturn.

Although Taylor Wimpey's creditworthiness was dented this week when Fitch downgraded its debt, there is no suggestion that either company does not have the ability to make payments after June 30.

Both Taylor Wimpey and Barratt made it clear there had been no central policy to withhold payments, although they reiterated earlier statements about managing outgoings tightly in current market conditions.

As well as preserving cash, builders are pushing buyers to agree sales by the end of the month by offering them ever-juicier incentives.

Buyers in a position to complete quickly can get help with mortgage payments, stamp duty, moving fees or new carpets, as well as securing cash discounts.

Among the most successful incentives have been "part-exchange" deals, in which large builders take on buyers' properties to stimulate sales. This has left Barratt with more than 1,000 unsold second-hand properties on its books, up from 740 just five weeks ago.

The rise reflects an increase in the popularity of the programme, according to Mark Clare, chief executive, rather than any difficulty in off-loading houses. Other builders have also introduced or strengthened their own trade-in offerings.

Jan Crosby of KPMG, the accounting firm, said part-exchange deals would do little to bolster builders' cash. "Those deals help deliver earnings and completions, but you still need to sell the part-exchange property to generate much of the cash."

Shares in the sector had a rare quiet day yesterday, with most builders only down slightly, and Redrow gaining ground following positive analyst coverage.