Cladding sector: Think you've got it covered?

The collapse into administration of Lakesmere – which, according to Building’s Top Specialists league tables this week, this year became the largest UK cladding and roofing contractor – was a shock to most of the industry. Whereas some firms fall after weeks of rumours, the announcement by Deloitte on 3 November that it had taken the bulk of the 241-strong business into administration came, for most, out of a clear blue sky. The shock was compounded on Tuesday when Deloitte revealed that McMullen Facades, its Northern Irish facades business employing 270 people, was also entering administration after previous assurances to the contrary. Just 48 hours later Deloitte said McMullen had been picked up by JRL, the Hertfordshire-based contractor best known for its concrete frame business J Reddington. 

One staffer at an installation subcontractor to Lakesmere, who has worked on contracts for the firm for 15 years and asked not to be named, said: “This was a massive shock to me. A massive, massive shock to everyone. Lakesmere’s always been such a cash-rich company, we thought it could never go under.” 

But if the collapse of Lakesmere specifically was a surprise, in a broader sense the collapse of yet another cladding specialist has not – alas – been greeted with great astonishment. The fall into administration of £119m-turnover Lakesmere, with the loss of 109 jobs, sees it join a long list of cladding contractors to have gone under, from Schmidlin in 2006, to Red Architectural and Baris in more recent times. With upwards of 20% of the cost of an average office job spent on curtain walling, building envelope firms are seen by many clients as both one of the most financially precarious and the most awkward to replace of all specialist contractors. 

News that Lakesmere founder Mark Davey is in talks to create a new incarnation of the group to finish off existing major contracts on Crossrail will come as a relief to both the firm’s remaining staff and its biggest client alike. But it is likely any new business will be far smaller than the original firm, which was behind cladding on iconic projects such as the London Aquatics Centre for the 2012 Olympics. So, what can be said about what happened to Lakesmere, how its clients will be affected, and where this news leaves the cladding sector overall?

Cladding firms just seem to be so fragile; there are so few left. Every job you have to rack your brains who to go to

Rab Bennetts, Bennetts Associates

Warning signs

While nobody expected Lakesmere to fall into administration, in hindsight there were warning signs visible to those willing to look.

The anonymous staffer at the Lakesmere subcontractor says that after years of being a very reliable payer, Lakesmere delayed payment of retentions this year for the first time. In addition, on one major London job, he says, Lakesmere this year struggled to get necessary PPE equipment delivered to site to allow work to go ahead – a sign, he now believes, that the firm had lost the trust of its suppliers. The Lakesmere subcontractor’s firm is now owed over £100,000. He says: “We were chasing retentions on a few jobs, and we kept being told that we just had to wait and everything would be paid up in November. Then came the statement on 3 November.” 

The statement in question was from administrator Richard Hawes – who has declined to answer any further questions – and said on 3 November that Lakesmere Ltd, Lakesmere Group and the group’s ultimate parent company, Graceful Holdings, were all being put into administration. It also made it clear that none of Lakesmere’s overseas subsidiaries had been put in administration, which at the time indicated McMullen was unaffected. The original statement said the collapse was due to “financial challenges, arising from a number of unprofitable contracts”. 

One of these contracts is likely to be the redevelopment of London Bridge station, on which client Network Rail has said cladding installed by Lakesmere has had to be removed and reinstalled because of “a problem with how the cladding had been installed and longer-term concerns over its durability to last the 25-year asset life”. Main contractor Costain is now delivering the installation itself, and Network Rail says the station is due to reopen on time in autumn 2018.

Another job potentially in the frame is the Wembley stadium re-roofing contract, on which work was meant to start in late 2015. Lakesmere has been delivering the job, to replace the original roof sheeting, alongside main contractor Multiplex. But two separate sources said the job had not progressed as well as expected and that it was a “problem job” for Lakesmere. A spokesperson for the Football Association confirmed that works on the job were “ongoing” and said: “We are liaising with our main contractor Multiplex who are dealing directly with their subcontractor Lakesmere.” Multiplex declined to comment on progress. 

If you have a live job with a cladding contractor that goes under, you’ll do really well just to find anyone able to deliver the rest of the job, let alone someone with the capacity to take it on right away 

Iain Parker, Alinea

Weaknesses

Companies rarely fall for just one reason, and Lakesmere’s published accounts also reveal wider potential weaknesses in the business. The firm achieved stunning growth from 2010 to 2016, during which period it tripled its turnover from just over £40m. While it made a healthy pre-tax profit in its most recent accounts, for the 12 months to January 2016, of £3.5m, the amount of cash in the bank had started to fall as it financed its growth. In particular, the firm’s liabilities increasingly outweighed its cash reserves, leaving it with a “net debt” (cash minus liabilities) that more than doubled between 2013 and 2016, from £10m to £22.4m. Having a net debt means a company does not have enough cash in the bank to pay its creditors if they suddenly start demanding immediate payment. The company grew far faster in 2016 than it had anticipated – its aimed-for £100m turnover had become £119m, which Lakesmere said had led it to take a more “cautious” approach in 2017.

A proportion of all this additional revenue came from overseas businesses, particularly in the Middle East. While none of these subsidiaries are now in administration, there were also some warning lights from this part of the business: Reuters in 2016 reported that the main contractor had halted works on what was one of Lakesmere’s largest overseas projects, the King Abdulaziz International airport in Saudi Arabia, after the government stopped paying it. In its 2016 accounts, Lakesmere said that money was more than 12 months overdue to it on “certain international projects”, and that there was “some risk” that £4.5m on one specific job would not be paid. However, it is not known if this debt related to the Saudi airport project or not, or indeed whether it was ever settled.

Another big event in Lakesmere’s recent history was the management buyout (MBO) of the firm from its founder and long-time owner Mark Davey in December 2015. This was led by group finance director Mark Johnson, and saw Davey relinquish the chief executive role, becoming chairman and international CEO. The owner of the McMullen Facades business, Ted McMullen, then became group chief executive amid a wider reshuffle. Two separate sources close to the business said difficulties stemming from the MBO were the biggest cause of Lakesmere’s downfall, rather than the problem jobs being principally to blame. However, Building has seen no concrete evidence of this. Whatever the reality, the leader of the buyout, Mark Johnson, resigned from the business in the middle of October, two weeks before the firm fell into administration.

Cladding fragility

Whether problem contracts, a troubled MBO, too rapid expansion or a combination of all these things presaged Lakesmere’s demise, there is little doubt in the wider industry that independent cladding companies are seen as among the most prone to financial difficulty. Many of Lakesmere’s surviving rivals, such as Prater – owned by Lindner Group, the German firm that bought Schmidlin (UK) out of administration weeks after it went bust – are now owned by large European materials firms, as so many standalone UK firms have gone to the wall. Examples since 2011 include the collapse of Compass Northern, Red Architectural, SHS Integrated Services and Baris Facades & Linings, the specialist behind the iconic Selfridges building in Birmingham. In 2015 Harley Curtain Wall underwent a pre-pack administration before being reborn as Harley Facades and ultimately going on to carry out cladding works on the Grenfell Tower refurbishment.

Rab Bennetts, co-founder of architect Bennetts Associates, says: “Cladding firms just seem to be so fragile; there are so few left. Every job you have to rack your brains who to go to. They’re beholden to design and build contractors and at the worst end of the market.” Given the lack of market choice and centrality of the cladding solution to the design of a building, cladding contractors are among the earliest engaged in projects while also being, obviously, among the very last to finish. This long engagement means they get paid slowly over the course of a job – a risk in itself, according to some. 

They take on a multifaceted role, first designing the envelope solution, then manufacturing or sourcing panels, then fabricating the whole solution, and then overseeing installation on to the building. The dominance of foreign materials suppliers in the market means that many end up assuming exchange rate risk for materials within the contract prices they agree. 

Julian Daniel, founder of construction management business Blue Sky Building, says: “Facades are one of the most vulnerable trades. It’s a very complex business, requires significant investment and bears a large fixed internal overhead. They win projects well in advance of them starting but often before financial commitment to proceed so it can be a lottery on which ones to back.

“But they’re often paid in arrears on projects, not paid for materials until they’re on site, and as they’re sourcing from overseas they regularly take currency price risk.”

Iain Parker, partner at cost consultant Alinea, says that in a recent survey of main contractors he undertook, quite a number said the prospect of their cladding specialists going bust was one of the biggest risks to their projects. “For as long as I can remember they’re notorious for going pop and reinventing themselves,” says Parker.

There’s not a worse trade to lose on a job than a cladding contractor – it’s one of the biggest risks to a project

Julian Daniel, Blue Sky Building

Huge risk

For clients and main contractors this fragility creates huge risks, because most cladding packages are bespoke designed and therefore almost impossible to replicate. The paucity of suppliers means lead times, currently at around a year, are longer than for almost any other trade. Alinea’s Parker says: “If you have a live job with a cladding contractor that goes under, you’ll do really well just to find anyone able to deliver the rest of the job, let alone someone with the capacity to take it on right away.” Blue Sky’s Daniel says: “There’s not a worse trade to lose on a job than a cladding contractor – it’s one of the biggest risks to a project. The heat efficiency and environmental performance of a building is all determined by the cladding system, determined by the contractor themselves. Replacing them is next to impossible without serious programme and commercial repercussions, or a compromise in building performance.”

It is hardly surprising, therefore, that Crossrail has worked with Lakesmere founder Davey to find a way to continue with existing projects, which include the Liverpool Street, Whitechapel and Tottenham Court Road station projects. This new firm is not thought to be taking on the host of other current Lakesmere contracts, which include the Wembley roof job, a £16m McMullen Facades job on the Highwood Tower at Elephant and Castle for Lendlease, the 4,000m² flight connections centre at Heathrow, and London Bridge station. On these projects, clients and main contractors are taking a variety of approaches. Experts say the response of clients is partly determined by the exact stage a job has reached – whether panels have been fabricated, and whether the installation has started.

So, while Costain is now self-delivering the remaining London Bridge installation, a spokesperson for Heathrow said that it had instead begun the process of finding an alternative supplier to complete the work, although it insisted Lakesmere’s going into administration “has not affected our operations.” Lendlease has, according to one industry source, appointed Prater to take over the Elephant and Castle job, but neither the administrator, Prater nor Lendlease would confirm this. Multiplex would not comment on the impact on the Wembley stadium job.

For Lakesmere’s subcontractors, too, its fall will come as a massive blow. The administrator has not yet tallied up how much the businesses in administration owe, but the group’s last published accounts show it at that time owing over £18m to trade creditors. The anonymous staffer on the Lakesmere subcontractor that is owed over £100,000 said: “We can just about absorb this. But I’m sure there’ll be other companies that can’t.”

So, while the individual clients, contractors and subcontractors involved will hopefully find solutions to minimise the damage to their projects and businesses, Lakesmere’s fall itself indicates that the industry overall is no closer to making its independent cladding and envelope businesses more stable.