Are construction firms at risk of insolvency in 2018?

In the wake of the Carillion collapse, the construction industry faces renewed concerns over the number of companies at risk of insolvency. The most recent insolvency statistics show the construction industry to have the second highest number of total annual liquidations per industry. The difficulties facing this sector can be attributed to a number of factors. In this article, we analyse insolvency in the construction industry and outline potential strategies for business recovery.


The construction industry and their risk of insolvency

The 2017 insolvency statistics highlight a slight increase in overall UK company insolvencies, and particularly, creditors voluntary liquidation. This process accounted for the most significant number of insolvency procedures in the UK – 74.6% or 12,861 insolvencies. The construction industry saw 2,633 company insolvencies in 2017. The number of construction firms facing insolvency saw a 0.5% increase year on year.

In 2017, the sector had a significant amount of issues, leading the press to speculate that over a quarter of UK construction firms will head into insolvency by 2020.

Construction industry insolvency

Construction insolvency cases

The Carillon collapse is the most notable case of compulsory liquidation within the industry. In July 2016, Carillion had a market value of £1 billion, expanding into Canada, the Middle East and the Caribbean. The company boasted a large number of employees – 20,000 in the UK alone, and 42,000 worldwide. However, as business expanded, many of Carillion’s contracts became unprofitable. The beginnings of the Carillion collapse came to light in 2016, with three profit warnings issued later that year. This, and the investigation by the FCA in regards to their HS2 contract, had a huge impact on the company’s market value – dropping to £61 million. You can read more on the Carillion collapse here.

While not currently facing insolvency procedures, B&Q – a leading UK DIY chain – has experienced a sharp decline in profits. Kingfisher, owner of the construction store, warned the outlook for the chain was ‘uncertain’, as they reported a 9% drop in shares. The rise of interest rates last November has also been suggested as an effect on the stability of the company.

Carpetright also recently announced their business recovery plan and is considering a company voluntary arrangement (CVA) to shut unprofitable shops and slash rent.

Why might construction companies face insolvency?

In the UK, insolvency rates in construction have always been high, with several common causes.

Cash flow

Late payments and bad debts are a primary trigger for company insolvencies. Payment of taxes can also lead to a substantial number of firms looking for business recovery plans. Paying tax in a lump sum, making several payments at a time and incurring penalties can contribute to a company’s cash flow issues, ultimately leading to liquidation.

Unfortunately, if you do not pay your VAT penalties or make part payments, it can lead to severe consequences. Not making payments indicates cash flow issues to HMRC, and you could encounter a default surcharge notice. HMRC will grant grace times for a company with their first late payment, and smaller businesses will be treated more lenient to that of larger companies, but if you happen to fall behind with payments, you must immediately contact the HMRC business payment support service.

There are two options for firms who are unable to pay VAT liability:

Competition

Construction output in the UK is more than £110 billion per annum, contributing 7% of GDP. As such, there is a lot of competition in the sector for large-scale projects. With a higher number of firms competing for jobs, often work is price sensitive. In many cases, charging the lowest price might seem the best option for gaining a contract. The increase in construction firms also causes many employers to look for well-known contractors, benefitting the bigger companies but leaving smaller companies without profit.

Credit

Due to the high numbers of construction industry insolvencies – both suppliers and clients many contractors either fail to make or receive payments, with cash owing to several external creditors. As such, construction firms tend to have larger debts, which can affect their ability to gain credit. The lack of capital assets to act as collateral can also mean credit is expensive when looking for business help.

Construction Industry Scheme (CIS) Arrears

The Construction Industry Scheme, or CIS, outlines the deductions firms take from a subcontractor’s payment, which is then passed on to HMRC. Every construction company must verify their CIS regulation, deduct the appropriate amount and submit the payments to HMRC, as well as monthly statements to the subcontractors. However, if you do withhold the payments, HMRC will act quickly. If you can pay immediately, typically, no further action will be taken. If not, you will have to negotiate agreements, similar to that of VAT penalties.

Speak to your creditors

You must consider the interests of your creditors if your company is experiencing cash flow issues. If you openly communicate with your creditors at an early stage, you may be able to put in place agreements that will allow you to spread payments to avoid facing insolvency procedures altogether. For example, an informal arrangement costs a lot less to put in place and ultimately, it is in your creditors’ interests that the company succeeds. Similarly, CIS or VAT arrears do not necessarily have to mean the end of your business. However, ignoring the problem will affect the longevity of your firm.

If your company is suffering any of these issues and you are unsure of the best way forward, our licensed insolvency practitioners can help create a strategy for your construction business.

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