The financial impact of Construction SMEs’ failure to take care of their Legal Business
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LawBite YouGov Survey Results - Construction Sector
What's this all about?
At LawBite we believe that law in the UK should be accessible, affordable and clearly understandable for the UK’s business owners. At the start of 2016 the Department for Business Innovation and Skills reported that 99.9% of all private sector businesses were small or medium-sized (SMEs) and that these businesses provide employment to 15.7 million people.
Arguably these businesses are the lifeblood of the UK economy, so as part of LawBite’s campaign to drive change in the legal industry we asked YouGov to conduct a unique, comprehensive and independent survey of UK Small Medium Enterprises to discover the financial impact when they fail to take proper care of the legal issues they face.
‘Construction survey respondents are losing more than £1.4 billion a year by failing to take care of their legal issues’
The economic analysis of the YouGov results was carried out by the Centre for Economics and Business Research (Cebr). We think there is an important message here for every business owner so we wanted to share the highlights with you.
The results within the construction sector specifically are startling; with an upper estimate indicating that construction respondents are losing more than £1.4 billion a year from this failure.
What are the risks to your business?
The survey has provided some shocking revelations that should make every business sit up and take notice. It’s virtually impossible to imagine what impact the loss of £1.4 billion might have on the construction sector so let’s break it down into real-world terms and look at the risks every construction company faces:
Firstly, we discovered that the average construction company in the UK is likely to encounter around 8 legal issues a year. This places those within the construction sector in line with the average across all survey respondents and therefore as much at risk in terms of frequency.
‘The average construction company in the UK is likely to encounter more than 8 legal issues a year’
Of the legal issues construction companies encountered costs are extensive with 46% resulting in costs of £5,000 or more. The average loss annually for those surveyed from the Construction sector is approximately £13,160 per company
The highest average annual losses were found in the Business Administration and Support Services (£44,958), Food and Beverage (£36,684), Publishing, Broadcasting and Media (£17,499), Finance and Insurance (£15,976), Construction (£13,160) and Charity/Voluntary (£12,160) sectors; making construction one of highest six amongst all the sectors surveyed (over 20).
What are the most common issues that Construction survey respondents face on a day-to-day basis?
More than half of all issues were found to be in six key areas:
- Disputes (16%)
- Customers and Suppliers (15%)
- Employees and Key Contractors (11%)
- Terms and Conditions (9.3%)
- Software (7.6%)
- Tax (7.5%)
- Other (33.6%)
Across the construction companies surveyed the highest amounts are estimated to have been lost in the following five areas:
- Disputes (over £318 million)
- Customers and suppliers (over £258 million)
- Tax (over £103 million)
- Loans or Investments (over £88 million)
- Terms and Conditions (over £87 million)
But it won’t happen to me… will it?
Given the number of incidences of these kinds of issue, construction respondents are overoptimistic about the prospects of future losses occurring because of these problems – with only 10% thinking these issues are ‘likely to pose a significant risk’ to their business.
‘Construction companies assume that risky outcomes are more likely to happen to other organisations than to themselves’
Interestingly, this percentage more than triples (37%) when they are asked to forecast whether these problems are likely to affect other businesses rather than their own. Construction companies follow the typical trend in assuming that risky outcomes are more likely to happen to other organisations than to themselves.
Do Construction companies think lawyers help reduce risk to their Business?
Having uncovered the number of times issues arise and in spite of the potential cost to construction companies of the losses involved, we found construction respondents remarkably casual about using lawyers to reduce their risks.
‘Construction respondents are remarkably casual about using lawyers…’
We asked construction companies about their expenditure on legal expertise and tellingly 46% were not even able to say how much they spent on legal services last year. For those construction companies that did know, the majority 58% reported spending less than £1,000 per year on lawyers.
This is a high percentage, however paradoxically the SMEs surveyed (including the construction sector) do understand that using lawyers is likely to make them better off. Of those SMEs who responded, 83% said that using a lawyer to deal with legal issues with commercial impact on the business had reduced the risk of higher costs, and 86% of those who responded (and didn’t use a lawyer in such instances) said that it could have reduced the risk of higher costs and losses if they had.
‘but SMEs do understand that using lawyers is likely to make them better off’
In the general survey SMEs were also asked to rank the possibility of commercial legal issues arising against the risk of typical SME problems arising such as: cash flow issues, supply problems, damage to reputation, problems from key staff leaving the business or data security problems.
‘83% said that using a lawyer reduced the risk of higher costs’
The analysis across all sectors showed that for every 10% extra an SME spends on legal costs, the chances of any of these other risks ranking ahead of commercial legal risks rises by as much as 90%. In other words, SMEs perceive that if they spend more on their legal budget then the relative risk of commercial legal issues arising for their business falls sharply. Although not specific to the construction sector this provides interesting insight in terms of the perception SME’s have that increased expenditure on legal support mitigates risk for commercial legal issues.
Why are so many construction companies not prepared to spend money on lawyers?
Our general survey results show that even though SMEs across all sectors surveyed know legal issues affect them frequently and cost them significant amounts of money, they are reluctant to invest in lawyers.
However, SMEs do take out insurance policies against a wide risk of other contingencies (directors insurance, employer’s liability, public liability). Insurance companies typically report that only 9% of SMEs make an insurance claim a year, whereas this YouGov survey shows that on average the construction sector respondents alone encounter more around 8 legal issues a year with significant adverse consequences from commercial legal issues.
Yet construction companies (along with many other businesses) are far less likely to want to protect themselves by taking out the simple ‘insurance policy’ of using a lawyer than they are by taking out an insurance policy against other risks.
A likely underlying cause for construction companies reluctance to use lawyers lies in attitudes to law firms, which the YouGov survey also covered. 65% of construction respondents say that legal documentation is not easy to understand, while only 6% say that legal fees are good value for money.
‘Even though construction companies know legal issues affect them frequently and cost them significant amounts of money, they are reluctant to invest in lawyers’
Only 11% of construction companies rate law firms as ‘good’ in terms of ease of access (how easy it is to contact a lawyer; how speedy their response is and how easy it is to get a situation alleviated).
‘Only 11% of construction companies rate law firms as ‘good’ in terms of ease of access’
However, the survey results indicate that construction respondents are able to clearly articulate what they do want from lawyers and law firms. Of those who gave a response, over 90% ranked all of the attributes below as important:
- Ease of communication (96%)
- Value for money (100%)
- Costs involved (98%)
- The speed of service provided (100%)
- Feeling “safe in their hands” (98%)
- Taking time to understand the issue (94%)
- They are more likely to resolve issues quickly (91%)
- Understanding the construction sector (89%)
- A bespoke approach to their need (89%)
Clearly, construction companies are not getting enough of these attributes from traditional law firms in order to persuade them to alleviate their risks from legal issues by engaging lawyers routinely.
What should those in the construction sector conclude from this research?
As someone working in the construction sector, your conclusion may be that engaging properly with your legal issues and guarding against them is going to potentially save you thousands of pounds a year. You are far more likely to have a legal issue than any insurance claim so you’d be better off spending as much or more on legal protection and advice as you do on your business insurance policies.
The biggest issues (and most expensive ones) you’re likely to face are all often easily preventable. Simple matters like having contract terms and conditions checked or drafted properly to ensure your employment or contractor terms are clear and up to scratch will de-risk your business rapidly.
‘The biggest issues (and most expensive ones) you’re likely to face are all often easily preventable’
If you’re not sure what you might need, you can have a free consultation with one of our expert lawyers (LawBriefs) to help any identify areas of concern and what you could do about them
If you’re reading this survey as a member or partner of a UK Law Firm then you should be shocked at how the industry is perceived by construction companies and how they’ve been underserved for so long. We urge you to join us on our mission to make the law more accessible, understandable and affordable for UK SMEs.
The survey asked SMEs to indicate their level of losses from a wide range of legal issues with commercial impacts. These comprised issues with:
- Customers and Suppliers
- Employment and Consultants
- Trading terms and conditions
- Intellectual Property
- Loans or investments
- Decision making in, or ownership of their business
- Regulatory matters
The survey covered over 20 business sectors including:
- Transport and storage
- Agriculture, Forestry and Fishing
- Arts, entertainment, recreation, cultural and sporting
- Mining and utilities
- Professional scientific and technical
- Recycling and refuse
All of the findings have been extensively analysed by the Centre for Economics and Business Research (Cebr). The statistical highlights of the narrative above are only a portion of data collected and analysed. We welcome any requests to discuss the findings in more detail.