The temptation of Coverite

The clue was the swivel chair. On Thursday 20 April it is rumoured that one of the directors of roofing contractor Coverite took his chair home. This was understandable - "it was really nice" according to a source close to the company. It was also six days before administrators from Deloitte & Touche arrived to seize all of the company's office equipment along with the rest of the company's assets. Coverite was bust.

Although most of the company's contracts were bought by Prater by the end of the same week, subject to client approval, the damage had been done. About 100 people, or two-thirds of Coverite's workforce, had been made redundant, and work on loss-making contracts in the north of England and London had been stopped.

Casual observers of the sector were surprised that Coverite managed to get itself into such difficulties. It had been in business for 56 years and must have gained a good knowledge of its trade and its market. It had also successfully tackled a string of difficult jobs, including the Scottish parliament and London's City Hall. On the other hand, many remembered that in February the firm had been caught in an Office of Fair Trading dragnet.

More informed observers put much of the blame on Coverite's management team, led by group managing director and proprietor Tony Speroni and his family. A few years ago it decided to launch a growth drive: in 2004, turnover grew 65%, from £20m to £33m. Luke Wessely, managing director of Allan Roofing, is critical of how this was achieved. He says: "People are overtrading. There is an inherent greed in the marketplace, chasing turnover."

Lee Manning, Coverite's administrator at Deloitte, confirms that some of the firm's recent contracts were secured on low margins and were ultimately unprofitable. It is believed that the net margin for many of these jobs was about 3-5%, whereas the industry standard is closer to 6-8%. Manning says: "Coverite had one or two difficult contracts on which they got their pricing wrong. The ones in the north were less well-managed than those in the south."

Credit: Brett Ryder

As a result of the underpricing, Coverite found that it did not have enough working capital to support its growth. Worse still, the company often failed to properly negotiate prices for the costs it incurred for contract variations. But what is not immediately clear is why being a few percentage points out in its estimation had such a drastic effect on a £33m turnover company.

The answer is partly that Coverite, like a number of its rivals, no longer just builds roofs. It provides a "total envelope solution". This means it also provides services such as cladding and guttering, and although this greatly increases the value of its contracts, it also greatly increases the technical expertise required. As the head of another roofing company puts it: "People are taking on too much work that's too complex and they haven't got enough people with the right skills to do it." This means that errors in pricing and design become more likely to happen.

This shift to envelope solutions is made more problematical by the increasing demand for metal-based structures. In the past, roofs were generally made of asphalt, but clients now want aluminium, steel or copper, as they are considered to be more durable. This is a costly change - for example, copper is nearly £4000 a tonne, asphalt £260. On average, materials accounts for 80% of the cost of a roofing project; a few years ago that figure was closer to 33%.

People are overtrading. There is an inherent greed in the marketplace, chasing turnover

Luke Wessely, Allan Roofing

This has exposed roofing firms to increases in prices on the world's commodity exchanges. If the price of asphalt rises 1% in the interval between tendering a job and ordering the material, the contractor is out of pocket by £2.60 a tonne. If the same thing happens on a copper roof, it is £40 down. And given the recent volatility in metal prices, estimating the job becomes more difficult and riskier - and if there is a dispute with a main contractor over payment, a cash-starved roofing specialist still has to pay its own suppliers.

Coverite is understood to have gone into administration because of its cash flow problems rather than its total debts. At the end of last year the contractor began a legal dispute after a contract was terminate by Shepherd Construction. Shepherd is understood to have acted after judging that the subcontractor did not have enough resources to finish a £20m project in Leeds.

Many roofers tried to support their burden of risk by forming cartels to inflate prices and reduce competition. Along with 12 other roofers, Coverite was prosecuted by the OFT last year, and in February it was given a £104,498 fine for one instance of collusive tendering. It was not the largest fine levied - Makers UK was stung for more than half a million - but its reputation was tarnished. One rival says: "If I were an architect I wouldn't recommend a roofer to my client that had been in a cartel."

As a result of that prosecution, Coverite's prices were negotiated down at a time when margins were already tight - and as it was continuing its policy of rapid growth.

However, the Speroni family was prudent. Last May it transferred ownership of its profitable traditional roofing business, Coverite Roofing Services, from the parent group to a holding company the family owns, Palace Corporate Finance. It is therefore now separate from the main Coverite business and so was not dragged into administration. It has even taken over some of the Coverite's contracts.

It was a wise move: Coverite Roofing Services continues to be successful, where the businesses that build more modern types of roofing were not. The main group's last annual accounts, covering the year to 30 June 2004, show an operating loss of more than £800,000. The directors admitted that there were further losses on the way, due to problems on contracts in its modern roofing subsidiary, Coverite Specialist Contracting.

At the time, the directors claimed that the group was restructuring to tackle these problems and had prepared a cash flow projection that showed it could "operate within its facilities". However, it is now clear that the plan failed, although at least one of the messers Speroni can still spin around in his swivel chair.