A rapid recovery in construction workload could push more firms into administration as contractors are squeezed by rising labour costs and greater demands on cash, Red Construction chief executive Graham Sturge warns.

 

Sturge expects work volumes to increase but believes the next 12-18 months could prove particularly dangerous if demand rises faster than the industry’s ability to resource and finance it.

 

“Work volume’s picking up. We can all see that,” he says. “I think it will pick up into next year, and that, from a cash point of view, is probably the riskiest time for construction.”

 

He adds: “That’s where you’ll see more people going into administration.”

 

It is an unusual warning at a time when the CN100 is showing stronger turnover, profit and cash positions among the industry’s biggest contractors.

 

But Sturge argues that growth consumes cash. Contractors have to resource projects before they receive the corresponding income, while slow payment higher up the chain can intensify the squeeze. 

 

“If you’re increasing in revenue as a business, if you’re increasing revenue as an industry, your cash is being eaten,” he says.

 

For RED, that means turnover is no longer the overriding consideration when deciding which projects to pursue.

 

‘Cash is what takes contractors under’.

 

RED increased turnover from about £62m to £114m and then £170m over successive years, helped by geographic expansion, diversification and recruitment.

 

The contractor has expanded outside London into Bristol, the South West and the East of England, while adding its One MEP operation.

 

But Sturge says Red has deliberately avoided growth for growth’s sake.

 

Over the past two years, the firm has increasingly assessed prospective projects according to when they consume or generate cash rather than simply the turnover they provide.

 

“Cash is what takes supply chain under. Cash is what takes contractors under,” Sturge says. “It isn’t their P&L [profit and loss]. It isn’t even their balance sheet. It’s the cash.”

 

That thinking also explains why Red has maintained a mix of large schemes and smaller projects.

 

Its special projects division undertakes jobs worth up to about £10m-£15m, helping smooth workloads and cashflow as larger projects start and finish.

 

Sturge describes the smaller schemes as the “grains of sand around the pebbles”.

 

Labour crunch ahead.

 

The other major threat from an accelerating market is labour.

 

Sturge believes contractors could face heavier wage inflation during the next 12-18 months, particularly in London and the South East.

 

The industry lost skilled European workers following Brexit, he says, but subdued construction demand since then has meant the full consequences have yet to be exposed.

 

If workloads rise sharply, that could change.

 

“I think finding and navigating your way over the next 18 months for labour is going to be key,” he says.

 

Sturge expects skilled tradespeople to become increasingly mobile as demand strengthens, forcing contractors to compete not only on pay but on site conditions and the ability of workers to earn consistently.

 

National insurance and wage increases will add further pressure and eventually feed into project prices, he says.

 

Why RED will not fix prices.

 

That volatility also affects how Red is prepared to contract.

 

Sturge says clients seeking fixed prices while labour and material costs remain uncertain could be transferring unsustainable levels of risk.

 

“Any contractor that sits there fixing their price at this point, I think they are the ones that are more likely to come unstuck,” he says.

 

“We won’t. We’ll run with the market. We’ll do what’s fair and reasonable for our clients.”

 

Rather than moving to cost-plus contracting, Sturge favours inflation fluctuation clauses that allow prices to follow genuine market movements.

 

He also believes procurement remains the fundamental obstacle to higher construction margins.

 

“The procurement at the moment is not set up to allow greater margins,” he says. “Race to the bottom is still there.”

 

A pre-tax margin of about 2 per cent remains normal in contracting, Sturge says, while firms reaching 3-4 per cent are performing extremely well.

 

That leaves limited room for investment or error.

 

Don’t be fooled by improving numbers.

 

Sturge therefore cautions against treating this year’s stronger CN100 figures as evidence that construction’s financial problems have been solved.

 

The industry is emerging from several years in which activity was suppressed by Covid, inflation and geopolitical shocks, he says.

 

That makes the speed of any rebound critical.

 

“The issue is if we get there too quick over the next 18 months, that will put too much strain on the economy of our industry, and it will hurt,” he says.

 

“If people aren’t ready for it, we’ll all suffer.”

 

The lesson from recent contractor failures, he argues, is already changing behaviour, with firms becoming more selective about work and more cautious over cash.

 

For Red, Sturge says, that is exactly what the increasing cash balances across the CN100 represent.

 

“I think it’s there out of caution rather than confidence.”

 

Interview by Ben Vogel