Despite operating in a tough, competitive climate, engineering and construction firms (E&C) could reinforce their financial foundations by as much as €95bn by improving working capital management (WCM) practices according to a new report from PwC: Bridging the Gap - Annual Global Working Capital Survey.
The report estimates that organisations in Asia could benefit from as much as €56.6m of this €95bn global reservoir –predominately by improving WCM in major capital infrastructure programmes.
Meanwhile firms in USA and Canada could free up to €15.5bn, with a more structured approach to WCM in the housebuilding sector alone forecast to release €11.2bn. The third biggest benefactor is Europe, with a potential pot of €15.3bn available (housebuilding - €4.5bn / materials - €3.9bn /E&C - €6.9bn).
For the UK engineering and construction sector, the working capital cash boost is estimated to be as much as €4.8bn.
While working capital is undoubtedly crucial to all businesses, it’s particularly important for engineering and construction firms which typically operate in a low margin, highly competitive sector and often without significant tangible asset bases. Cash underpins every area of their operations, according to Jonathan Hook, Global Engineering and Construction leader, PwC:
“Engineering and construction is one of the world’s highest capital consuming industries – but as our report reveals, cash boosting opportunities can certainly be found right on the doorstep. By taking steps to further improve working capital practices and implement the necessary disciplines throughout the business, from onsite engineers to financial controllers, the industry could receive a cash prize of up to €95bn.
“In a volatile market, it’s critical for all companies to recognise the importance of enhancing their performance in this arena.”
Bridging the Gap states that if working capital management processes break down, business could find themselves in the danger zone. The report highlights two common challenges:
Change - complex capital projects are often subject to design change and cost and time overruns. Key to good working capital management is how companies manage that change with their clients and through the supply chain and build in the right contractual and commercial mechanisms to support that.
Retentions - increasingly, a percentage of the contract value is held back for a set period in case issues are found at completion. The ability to manage the tail end of projects, rectify defects and collect retained funds can, in some cases, make the difference between a project being financially successful and failure. Keeping teams focused on financially closing out completed jobs can make a real difference to working capital.
The report recognises that while many companies in the three sub-sectors - engineering & construction, housebuilding and construction materials - have a good focus on cash, it’s often not sustained across projects or the organisation.
By focusing in on the detail, ignoring some of the distorting factors such as advance payments, and managing each milestone and bill on its own merits, they can find ways to release even more cash.
Daniel Windaus, working capital partner at PwC, said: “Working capital is a strong barometer for how freely cash flows in a business. In efficiently run businesses, cash runs freely; in others, cash gets trapped in working capital, restricting the company’s ability to grow.
“The engineering and construction industry suffers from its fragmented nature, and the fact that control is often decentralised, often down to a project level. This makes working capital control harder to influence from a central finance perspective and forecasting of working capital more challenging than many other sectors.
“But it’s not an insurmountable issue. To date the team has worked with firms across the globe to release €26bn of funds tied up in working capital, not only demonstrating that this can be done, but that it needn’t be a painful process either.”
