Construction & Engineering

DSO 6.0 ⇑

DIO 1.9 ⇓

DPO 12.4 ⇑

DWC 5.6 ⇓

Despite higher DSO, longer supplier payment cycles drove a reduction in average DWC.

The government-led uptick in infrastructure construction contributed to 90% of the sample of Construction & Engineering companies reporting higher revenue in 2019. However, only 70% of the sample also achieved EBITDA growth.

The average DWC of our sampled companies fell by 5.6 days to 32.8 days in 2019, with 50% of the sample showing improvement. This was driven by an average 12.4 day lengthening of the supplier payment cycle (to 87.6 days) and lower inventory holdings (DIO down 1.9 days to 22.3 days).

In our past reports, this sector was characterised by relatively long collection cycles (DSO) and shorter creditor payment timeframes (DPO) creating a “structural funding gap”. In 2019, 60% of sampled companies reported a “funding gap” and two thirds experienced an increase in the size of the gap from the prior year. However, a number of companies were able to extend the length of their supplier payment cycle. Notably, half of the sample did so by two weeks or more. This resulted in a material increase in average DPO for the sample, so much so that, on average, the sample does not show a “funding gap” – DPO is now higher than DSO. A contributing factor to this has been the increased use of “reverse factoring” and other supply chain financing encouraged by larger businesses to their suppliers to offset extended payment terms.

For our sample, we also noted a general trend over recent years of DSO drifting upward due to developers and endclients becoming more demanding in examining and approving claims. This means that there is increasing pressure on the sector to look for continued process improvement initiatives (coupled with the above financing strategies) to keep billing and collection cycles as short as possible.

SRG Global was the biggest improver in 2019, with a 35.8 day decrease in DWC driven by reductions in DIO and DSO of 26.7 days and 22.1 days, respectively (that allowed the business to pay its suppliers nearly a week more quickly than the previous year). This unlocked a notional $23.3 million in additional cash from working capital.