Benjamin Rutz
Director, Business Restructuring Services, PwC Switzerland
Claude Fuhrer
Partner, Deals Strategy & Operations Leader, PwC Switzerland
In this article we look at market developments in the construction sector, zooming in briefly on Switzerland. Concerns: input price inflation, cash flow pressures, higher interest rates.
Cash flow and funding pressures
Times remain tough for construction, with a challenging macroeconomic situation combining with extreme raw material price inflation and labour shortages to create ongoing cash flow and funding pressures. Suppliers of materials are having to contend with more frequent overdue payments. In some cases input prices are rising so quickly that supplier quotes are valid for only 24 hours and are subject to payment up front to secure a price.
Often contractors also depend on new business to generate up-front payments from customers to finance the operational costs of existing projects. Given that new projects appear to have declined significantly in the three months to end-July, cash flows are going to come under even greater pressure.
Another source of financial stress for many contractors is the fact that they find themselves with a growing number of loss-making contracts on their books. This is because it’s common practice in the industry to agree fixed price contracts without built-in inflation adjustment mechanisms.
In addition, ongoing interest rate hikes pose another challenge, as they will reduce demand for construction services.
“Given the ongoing factors stressing the construction industry, smart operators will be trying to find ways of operating with greater agility and efficiency, managing contracts and risks more carefully, and using technology to bridge labour shortfalls.”
Implications for restructuring
Against this challenging backdrop, restructurings have been attempted for some contractors encountering sizeable losses on contracts or wider issues with trading. Many corporates will be keeping an eye on how these processes turn out to see ways of preserving value and avoiding liquidation scenarios where there is no value for shareholders and creditors recover only a limited portion of their lending's.
Building construction material cost development in Switzerland
Source: Swiss Federal Statistical Office, KBOB building construction materials price index
Key focus areas for the construction sector
Source: PwC Analysis
Zooming in on Switzerland
Prices of building materials have also risen sharply in Switzerland (see graph). Further energy price hikes and energy shortages would make materials like cement and steel even more expensive. Combined with the anticipated interest rate hikes, this could further dampen construction activity. In this environment, prudent contract management will be a must for construction firms.
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Contact us
Director, Business Restructuring Services, PwC Switzerland
Tel: +41 58 792 21 60
Claude Fuhrer
Partner, Global Health Industries Transformation Leader, PwC Switzerland
Tel: +41 58 792 14 23