Difficulties Ahead for Social Housing Contractors Following Connaught Collapse?

Whilst the shock waves from the collapse of Connaught are beginning to die down, questions remain as to why it happened and attention Contractors Near Me Free Estimates is also now turning to the risks faced by other industry players who could soon potentially find themselves in a similar situation.
Banks rejected a three-year rescue plan for Connaught, which would have required a A�50 million injection to keep the company afloat. One of the reasons for the rejection was apparently a A�42 million black hole in the accounts, with administrators KPMG estimating this value of work in progress was irrecoverable. Added to this was an assumption that the company would have an annual turnover of A�450 million and a profit of A�17 million by the end of the plan’s third year, which was considered optimistic at best.
There had been earlier signs of problems ahead, with the Financial Reporting Review Panel requesting a clarification of the accounts after a 25th June profit warning. Following the collapse, there are suggestions that the Department for Business may investigate any possible wrongdoing while auditor PricewaterhouseCoopers may have to answer to the Actuarial and Accountancy Discipline Board.
Morgan Sindall was quick to buy up most of Connaught’s contracts for a reputed A�28 million, expecting to add A�200 million of annual revenues as a result. However, many councils were reportedly taking the opportunity to re-tender their contracts. The reasons given are that they are wary of legal challenges from rivals if they simply accept the transfer and also wish to spread the risk. Sefton housing association One Vision has apparently decided to take the repairs and maintenance service in-house and there are hopes it will recruit some ex-Connaught workers to soften the impact of recent job losses. Nevertheless, Morgan Sindall announced it was happy with the deal, despite the possible loss of some contracts.
The situation does tend to put the spotlight on Connaught’s rivals, especially in a market sector that is likely to suffer as government spending cuts start to take effect. Although the market for social housing work is estimated at A�9.2 billion annually, it has Renovating A House Cost remained at around this level for some years. Consequently, the only way companies can increase their turnover is by taking market share from others. It is also a very fragmented market, with the ten largest operators having little over a quarter of the total.
Nevertheless, industry analysts and experts have been keen to downplay the risks to other companies, alleging that Connaught was largely responsible for its own downfall. It was widely viewed as an aggressive operator in the market and put in bids for contracts that were too low to be sustainable in the long term. One example that came to light after the company’s demise was its A�125 million, five-year contract for Norwich City Council, won only in April. This received a legal challenge at the time from rival bidder Morrison, which alleged the bid was unrealistically low. In the event, the job is expected to make a A�2 million annual loss.
In addition to aggressive pricing to win market share, Connaught is also accused of operating questionable accounting practices that disguised its problems. One allegation is that the company tended to book turnover and profit that it expected to achieve over the life of a contract, even though the work wasn’t actually yet awarded. The strategy appears to have been to win contracts with low bids and then boost revenue through extra work that was expected to come along later. Whilst anticipating future revenue does not actually breach accounting rules, it was probably the extent of the over-anticipation that contributed to the company’s failure. And, if it happened, it does to some degree explain the large value of work in progress that KPMG now reckons is irrecoverable.
There is a view that the failure of Connaught may be a good thing for the industry in the long-term. It will tend to level the playing field in terms of pricing and may reduce some of the competitive pressures. That being the case, the prospects for those remaining may be better, providing they are not operating the same pricing and accounting policies as Connaught appears to have done. If so, they’re likely to be better placed to weather the coming storm of spending cuts.

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