A framework for construction business recovery in small and medium sized privately owned companies

Jagafa, KAI

Abstract

In the summer of 2007, the UK financial market suffered a meltdown that drove many construction companies of all sizes out of business. The large construction companies seem to wither the storm while the small and medium sized companies closed shop in unprecedented numbers. According to the BBC, construction insolvency hit a record high of 6,355 in 2009. The Office of National Statistics (ONS) also reports that, 2009 was the first time business death outnumbered business births since the year 2000. In that year, construction accounted for 15-20% of all insolvencies in the UK. The adverse effect has changed the climate for Construction businesses in the UK. Firms are faced with tough decisions to make in order to secure their own survival. However, it is also true that, though there is an increased interest in reversing decline in construction, there isn’t much rigorous and systematic research done on corporate level turnaround in construction companies. Failure studies in construction have focused more on explaining failure at the project level than on corporate level. This research asks the question ‘how can a small or medium sized, privately owned construction company turnaround?’ The research interest is to find out what happens at the critical stage of a turnaround – the decisions made, the actions taken, how they were taken, why they were taken, to know the strategies that have worked and those that did not work, and then, design an effective turnaround framework. Therefore, using Altman’s Z-score bankruptcy prediction model, 9 successful turnaround companies were identified, and 12 unsuccessful turnaround companies were selected purposively but fit the criteria. Turnaround strategies of the two groups were looked at and compared.

The findings showed that the key factors necessary for a construction company to ensure a successful turnaround are: leadership and people; improving working capital; support of stakeholders; a functioning market; selective tendering; business development; use of technology, and access to advice. It was also found that the business model of having the banks as sole providers of leverage was flawed. The findings also revealed that in times of difficulty or recession, two distinct types of construction companies emerge; the Conservative Company and the Progressive Company. As such, it was also revealed that there are two distinct business recovery approaches in construction – the Conservative and the Progressive approach. The Conservative companies, emphasize efficiency, tender for much smaller jobs, and make use of a mixture of, cutback and management turnaround strategies in almost every aspect of the business as they wait for the storm to pass – more like hibernation. On the other hand, the Progressive companies, though efficient, use growth strategy to take advantage of the market – buying other companies, tendering for much bigger jobs, and taking on new and experienced staff that other companies could not afford to keep. Restructuring strategies were seldom used as most companies stuck with the core strategy of their businesses.

It was also revealed that most of the recovered companies operated with; no debts, were self funded, had some type of framework contract and multi-phased or repeat projects that kept them afloat, reduced their margins and tried to breakeven in tighter situations. While the unsuccessful turnaround companies were found to have been plagued with a combination of high gearing, bad debt, and cash flow problems, which ultimately caused their demise. Although all sectors of the industry suffered, it was revealed that, companies with operations in the utilities/renewables, and commercial sectors of construction were more likely to recover quicker from a downturn than those with operations in residential development, and industrial sector.

Citation

Jagafa, K. (in press). A framework for construction business recovery in small and medium sized privately owned companies. (Thesis). University of Salford

• Thesis Type: Thesis
• Acceptance Date: Feb 10, 2016
• Deposit Date: Jun 17, 2016
• Publicly Available Date: Jun 17, 2016