Subcontractors to be paid directly

From a commercial property viewpoint an easing of credit and availability of finance for property lending will provide some real impetus to growth.  My colleague Neil Slade talked about a shortage of new development where demand exists but credit is difficult and I thought it was worth supporting Neil’s piece with a little more detail.

Well the headline from the latest Ernst & Young Item Club that “The crippling credit crunch is loosening” certainly seems to be a pointer that the availability of credit may be getting a little easier.

There is little doubt that the ongoing credit crunch and crisis in the Banks continues to affect business thinking nearly 5 years on from the start of the world’s economic woes.  The effects on property both commercial and residential are well catalogued and there for all to see – not least the retreat of values!

It is not an argument for inflating property values – what we need is more financial liquidity in the market to ‘make things happen’.

The Item Club lays bare some of the statistics around the credit crunch.  Part of their commentary was how UK Banks borrowed “£900 billion” that was borrowed from overseas up to 2008 and how we’ve been paying the price ever since as the UK reigns back from the £100 billion a year that Banks were using to fund domestic lending.

The Item Club explain that once it happened, the breakdown in the funding markets triggered several other crucial factors.  Secondary banking subsidiaries had to be supported, straining capital adequacy ratios.  Loan losses had the same effect.  Bank boards, as well as their shareholders and regulators, became very risk-averse as the losses mounted.  Tougher capital and liquidity requirements exacerbated the lending squeeze.  The ensuing recession made Banks even more worried and of specific concern for those earning their money in the property market, about the solvency of mortgage borrowers and small businesses.  Lending was depressed because the economy was depressed and vice versa, a classic vicious circle.

The Item Club thinks the background of tight credit and the Banks’ liquidity issues may be coming to an end with credit and liquidity requirements having been relaxed.  The Bank of England’s new Funding for Lending Scheme is designed to increase the flow of credit and reduce its cost, increasing the funding gap, or at least slowing the speed at which it is paid down.  It will reinforce the effect of the revival of the UK mortgage-backed securities market seen in recent weeks.

Ernst & Young say that ‘Although banks remain very risk-averse, they are effectively shifting the risk lending to affluent home buyers who have equity to invest.  In the case of first-time buyers, the builders and the government are shouldering the risk through new-buy schemes.  The banks’ capital base is also recovering’ they say.  Furthermore they comment that ‘These developments help to explain the marked improvement in the mortgage market suddenly being signalled by the Bank of England’s Credit Conditions survey, the sharpest since this survey began in 2007.  In the third quarter of this year, a significant proportion of mortgage lenders said they had loosened their lending criteria or were planning to do so, while 22% were planning to reduce the mark-up on mortgage rates.  The survey suggested that little movement in unsecured lending and forecast a continued deterioration in the outlook for lending to small companies, which it seems, are still regarded as too risky.  Nevertheless, these developments are encouraging.’

A lot of economic detail but for ‘property watchers’ and for those like us working in the property industry these are important pointers for how the market may perform over the next 12 to 24 months.

Not sure we can say this is the end of the credit crunch although we’d all hope that, it may just be the ‘end of the beginning’ The headline in Building Magazine this week was all about the retailer John Lewis considering direct payment for sub contractors.  It is perhaps unsurprising that John Lewis are pioneering this approach considering their history of procurement via management contracting utilising framework sub-contractors.  The potential for construction contracts to allow for sub contractors to be paid directly, if main contractors are not paying them quickly enough, is a potentially useful way to speed up payments under building contracts.

This news is perhaps something to do with another recently topical subject of debate, which was concern over the state of cash flow amongst the UK’s major contractors.  There has been a pattern of deteriorating cash positions amongst some major contractors over the last 12 months.  The reason has, in part, been because the major contractors are being pressurised by public sector clients to pay their sub contractors on a far quicker basis.

Our experience with the major regional contractors has not been one that has been of too much reported concern over the last few years.  The regional and local contractors are all too often very aware to ‘help’ their sub contractors and prompt payment, or payment as quickly as they are able to make it, seems to be a priority.

The news though from John Lewis may be a very interesting development.  The move would potentially make John Lewis with Waitrose one of the first private sector companies to set out and demand such a requirement.

The confidence this could give to sub contractors and in turn their keenness to bid competitively knowing they can be paid by a ‘solid’ end user procuring the building and not only by the main contractor could see some real benefits.

Demanding a supply chain that gives better guarantees of prompt payment can only be a good thing for the construction industry and something the Building team at Harris Lamb will be keeping a close eye on.

For information on how the Harris Lamb Project & Building Team can help with your construction contact one of the team at Harris Lamb on 0121 455 9455 or email

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