U.K. Builders Retain $1.7 Billion in Payments in Recession Sign

By Tim Barwell

Oct. 17 (Bloomberg) -- British construction companies may be withholding almost 1 billion pounds ($1.7 billion) in payments to suppliers, a sign the credit crisis and a looming recession are spurring a grab for cash.

The handing over of final payments, withheld until a project is completed, has slowed ``dramatically'' over the last four weeks and the amount of money owed could be about 50 percent more than two years ago, National Specialist Contractors Council head, Suzannah Nichol, said in an interview yesterday. The 7,000 NSCC members are preparing to cut jobs, she said.

The U.K.'s 82 billion-pound building industry, accounting for about 5 percent of the economy, has ground to a halt, with little work being booked because of faltering demand and a credit freeze, said Nichol. The collapse of Lehman Brothers Holdings Inc. and banking turmoil, at a time when homebuilding is suffering its worst slump for 25 years, confirmed industry fears a recession is inevitable, she said from her London office.

``I was asked to do a job in June, when they knew they never intended to pay me,'' said Barbara Beeson, a blinds fitter in Eastbourne, southern England, who had to file legal proceedings against Oakdene Homes Plc to get 12,000 pounds owed on a job. ``My business wouldn't have survived if I hadn't got them to pay up.''

Just 15 percent of the NSCC's members are paid within 30 days of completing a job, Nichol said. The average is about 60 days while Carillion Plc, Britain's No. 2 builder, averages 86 days, she said. Carillion Chief Executive Officer John McDonough said his Wolverhampton-based company always pays on time.

``We can't afford to bugger around,'' said McDonough in an Oct. 14 phone interview. ``In the big boys' league, we all know the rules of the game and we stick to them. Smaller, less savvy companies might muck around.''

Building Slump

Oakdene Homes, based in Reigate, is in rescue talks with banks after a freeze in mortgage markets and tumbling sales. Taylor Wimpey Plc, the No. 1 homebuilder, has until February to persuade debt holders to ease covenants.

``There's a bit of a supply chain paying later but nothing out of the ordinary,'' Oakdene CEO Carl Turpin said in an Oct. 15 call from his cell phone. ``Our people are always looked after.''

Britain's economy may already be in a recession and inflation may slow below the central bank's 2 percent target, Bank of England policy maker Andrew Sentance said on Oct. 13. U.K. unemployment rose to the highest level in almost two years in September.


Homebuilders have been at the mercy of banks after the mortgage market failed to benefit from interest rate cuts. Building may not grow again until 2011, the Construction Products Association, which represents 85 percent of the industry's suppliers, said in an Oct. 2 report. That's reversing a 10-year building boom, when more than 100 billion pounds of new orders for retail-related projects or offices were initiated.

Cash Ploy

``Private new orders are looking down, and we're expecting a big fall off,'' said Howard Seymour, an analyst at Numis Securities Ltd. Construction firms ``have got to be really careful'' on the issue of holding payments back.

``Cash conservation is where it's at right now, but killing the subcontractors doesn't make sense,'' he said.

For subcontractors, the slump may deepen. As an office block may take two years to build, with the finishes such as electrics and carpeting added at the end, construction is a ``late cycle'' industry. An economic slump will have a bigger impact on building-services once retail, manufacturing and other areas have already been hit, Seymour said.

`Different Environment'

``It's a completely different environment that even four weeks ago,'' Nichol said. ``Immediately we're seeing payment length stretching. The main contractor sits and holds onto that money, earning interest. The housebuilders certainly use it.''

Outstanding final payments totaled about 812 million pounds at the end of June, up from 650 million pounds two years ago, according to NSCC calculations extrapolating data from quarterly surveys. Findings from the latest survey will be published at the end of this month and Nichol said a figure of 950 million pounds ``would not surprise.'' ``Across the industry it's billions,'' she said.

Homebuilders imposed price reductions of as much as 10 percent on previously agreed work, delaying payments and withholding so-called retentions between January and April, Nichol said. That ``stopped dead'' around June, when homebuilders halted work-in-progress and began laying workers off.

Some companies ``bat away'' contractors who ask for payment, whereas others pay only when a legal writ is issued, Nichol said.

``I tried phoning, e-mails and letters, but there was never the courtesy of a reply,'' said Beeson, who fitted blinds at three of Oakdene Homes's developments, in an Oct. 13 phone interview. ``If they hadn't settled, I believe that some assets may have been seized.''

To contact the reporter on this story: Tim Barwell in London on tbarwell@bloomberg.net