Insolvency figures in the UK continue to rise across the board. But one particular sector is suffering notable financial distress – the construction industry.
According to recent data from the Insolvency Service, the construction industry currently accounts for 17% of all insolvencies in the UK – more than any other sector. Over 4,690 construction firms have been declared insolvent so far in 2024 – a 53% increase over the last five years.
Analysis by EY-Parthenon on profit warnings issued by listed construction companies has further brought sector vulnerabilities into stark relief. It recently revealed that 48% of companies in the Household Goods and Home Construction FTSE sector had issued a profit warning in the last 12 months, with nine in the first half of 2024.
The bad news doesn’t stop there. Further data released by The Insolvency Service also highlighted that 349 (24%) of self-employed or trader bankruptcies in the year to April 2024 were in construction.
Not great news at a time when our government has a focused agenda to get Britian Building, with ambitious new construction targets – both commercial and private.
Why are construction insolvencies so high?
A combination of several factors is serving to compound the woe for construction businesses right now:
- Inflation – high-cost inflation of building materials (up an average of 37% over 5 years) is hitting profitability hard. As an industry that typically operates on very narrow margins, even a small increase in costs that cannot be passed on to customers can cause significant financial distress
- Skills shortage – the industry faces significant recruitment and training challenges, with a need for an extra 251,500 extra construction workers by 2028 to meet the expected levels of work
- Energy prices – high global energy prices have increased operational costs, making it tougher for construction companies to manage their budgets
- Debtors – it’s an industry renowned for payment delays, with debtors creating a significant impact on cash flow
- Contract terms – fixed-price contracts are common in the construction sector, but with a surge in costs firms can face significant losses
- Regulation – it’s a heavily-regulated market, particularly following the Grenfell disaster; compliance is an increasingly costly burden, especially for small firms
- Planning and project delays – these are common across both public and private sector projects. For example, Leverets recently reported on a significant issue whereby Natural England has been instructing planning authorities not to grant approval for housing developments across large areas of the Kent countryside, due to harmful levels of nitrogen and phosphorus caused by wastewater.
- Legacy – many construction companies have legacy projects which cause them huge headaches. A notable example is Interserve, where certain “energy from waste” (i.e. power plants fuelled by household waste) projects helped to drag them under.
So, what’s to be done?
There is promise of a brighter future for the industry if the Labour government’s new construction strategy comes to fruition.
In the meantime, as construction businesses continue to struggle with rising costs, economic uncertainty, labour shortages and declining demand in some sectors, there are a range of measures they can and should take, dependent on their individual needs and level of financial distress. These include cost cutting and refinancing, or formal restructuring procedures such as CVAs.
As the Carillion Joint Inquiry pointed out, early intervention is vital. It firmly pointed the finger at the various problems with the company’s culture, corporate governance, reporting and business model. Construction companies must have an accurate and up-to-date understanding of their balance sheet, projects, and cash position, including proper scrutiny by the board, auditors, and professional advisors.
Leverets can assist construction business facing the prospect of insolvency, by providing:
- Valuable guidance and support for directors, ensuing they are aware of their duties and liabilities
- Expert representation from a blended team of barristers and solicitors with over 30 years’ specialist experience
- Proactive early advice to guide construction businesses through their options, as well as how to minimise risks and mitigate the impact of financial collapse.
Our team have been providing legal advice and assistance in insolvency matters and CCDA proceedings, including handling statutory demands and recovery planning, for over 30 years. We apply the very highest levels of precision and expertise. Our blended team guarantees superior results, whatever the nature of the case.
