Despite Government attempts to streamline the planning process, uncertainties around permission timescales remain, making financial management in construction more challenging.
Construction companies know that good project management is the key to both keeping customers happy and delivering the cash flows and margins their business models require. But delivering projects on time and on budget can be challenging given that one of the most significant levers is not within their control: they must rely on local authorities approving planning applications in a timely fashion.
This is a major headache for financial management in construction. How can a business make financial forecasts with any certainty when it is so dependent on the planning process? All the more so in the current climate, where bank finance for construction companies isn't always easy to secure.
'Lending to the construction and real estate sectors is continuing to contract.' Richard Woolhouse, chief economist of the British Bankers Association, November 2015.
There is some good news. Stung by criticism of the UK's failure to build new houses in sufficient numbers, the Government has this year sought to pressurise local authorities to move faster on planning. In summer 2015, it announced that developers might be given automatic planning permission on disused industrial sites and unveiled a crackdown on authorities that are too slow to develop local plans or determine applications.
Moreover, the efforts of successive governments, as well as the wider economic upturn, have already delivered improvements. There has been a consistent rise in the number of detailed planning permissions granted in recent years. In 2011, there were just 158,000 permissions granted, rising to 189,000 in 2012, 204,000 in 2013, and 240,000 in 2014. Official statistics from the Government for 2015, though not yet complete, suggest 2015 may have seen a further rise.
Nevertheless, serious problems in the planning process remain. With national and regional housebuilding targets abolished, and planning powers much more devolved to local decision-makers than in the past, many in the construction sector complain that 'Nimbyism' is clogging up the system. Certainly, the statistics suggest that the planning system remains frustratingly slow in many areas of the UK. For example, the British Property Federation (BPF) recently warned that in London, Manchester and Bristol, it is taking local authorities an average of 32 weeks to make planning decisions on major schemes, more than twice the Government's target of 13 weeks.
The BPF also pointed out that average waiting times are rising rather than falling, with the average decision in London, for example, having risen to 34 weeks this year from 28 weeks in 2014. And while this is disappointing, it's difficult not to sympathise with local authorities, given the pressure their budgets have come under from reduced central government grants, as the Treasury has sought to reduce the deficit.
Putting those sympathies aside, however, these difficulties have serious implications for the construction sector. Financial management in construction remains challenging, because there is so little certainty about factors that are outside companies' control.
That requires construction companies to build room for manoeuvre into their financial planning and forecasting. Tough government initiatives to accelerate the planning process continue. Construction companies will need to ensure they have sufficient contingency to cope with delays. They should be putting in place sophisticated systems for rapid analysis of the effects of changing timescales on the finances of every project they manage. These systems should be agile and flexible enough to manage ongoing changes in step with business need. Those companies able to efficiently manage change, adjusting their financial modelling as the planning environment evolves, will secure a competitive advantage.
TAKEAWAYS:
- Planning delays persist and construction companies must plan accordingly.
- Financial models must include sufficient contingency to give construction companies room for manoeuvre when delays occur.
- Good project management systems will enable construction companies to quickly analyse the impact of delays and other changes, and to respond accordingly.
