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CONSTRUCTION SECTOR INSOLVENCIES THE HARSH REALITY
5 December 2022
INSOLVENCIES WITHIN THE CONSTRUCTION SECTOR HAVE DOUBLED in the last 12 months.
So, what are the main reasons for this unfortunate, upward trend?
The construction sector’s always been one of the ‘at-risk’ sectors when it comes to insolvency figures. However, current statistics show that industry failures have rocketed since the start of last year (2021).
In the first quarter of 2022, the number of UK construction companies in ‘critical financial distress’ was reported as being in excess of 50% higher than the same quarter in 2021. This figure’s around 20% higher than is being seen across the economy as a whole.
The cause can be set out in the main under the following five categories:
- Dilution of government support
- Cash flow problems
- Labour and material shortages
- Low profitability
- Getting “knocked”
1. dilution of government support
The temporary support measures implemented during the pandemic prevented a sharp rise in insolvencies. However, an increase in failure’s now inevitable, as the support’s considerably diluted and companies are forced to face the reality of their financial situations. Repayments of financial support schemes offered by the Government during the Pandemic are all adding to the pressure. Somewhat inevitable, but the ostrich no longer has anywhere to bury its head in many cases.
2. Cash flow problems
This has always been an issue within the sector, with small contractors squeezed by larger customers on payment terms, in many cases able to obtain little relief from suppliers. At FTS Recovery, we’re able to offer direct and indirect funding solutions as part of our wider offering.
3. Labour and material shortages
COVID-19, Brexit and in some cases the war in Ukraine, have led to issues in obtaining timber and steel. Roofing and landscaping products are also becoming more difficult to obtain across the UK. ‘More demand, less supply’ has naturally led to a hike in costs. Similarly, quotes provided historically are having to be revisited, in many cases, due to the customer “pulling” the potential contract. Like many other sectors, a skills shortage is also a real and present danger. In construction, much of these issues can be directly pointed towards Brexit and a ready lack of otherwise qualified workers.
4. Low profitability
Construction’s becoming a more and more competitive market. We’re regularly seeing the issues arising from underpricing a job. In such circumstances, the smallest issue that arises during a project can cause catastrophic results for cash flow.
5. Getting “knocked”
Anything which involves a long line of contractors and suppliers (against the backdrop of all of the other factors discussed above), is a recipe for disaster. We’re seeing more and more impacted directly as a result of another’s failure.
“The number of UK construction companies in ‘critical financial distress’ was reported as being in excess of 50% higher than the same quarter in 2021."
what Formal insolvency solutions are there?
If your construction business is experiencing financial difficulty, early advice can lead to rescue options being explored. We’re here to help.