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The construction industry is often seen as a bellwether for the rest of the economy with the site of enormous cranes at work above our cities a sign of rude health and activity.
So what does it mean when it is also the industry with the most corporate insolvencies overall and that they have been growing annually since 2020?
When we talk about the construction industry as a whole we’re actually talking about three separate and distinct disciplines within it.
There are construction companies which are concerned with building and contracting services to complete these projects.
Another discipline is Civil Engineering which deals with design, construction and maintenance of public works such as roads, bridges, canals, airports, sewer systems and railways amongst others.
The third discipline combines artisan disciplines such as electricians, stonemasons, bricklayers, finishing and fitting constructed buildings and the other end of the spectrum including demolition and site clearances.
Looking at the number of insolvencies within the industry from the past four years we can see that despite two years where the numbers were artificially reduced due to the Covid-19 pandemic and subsequent lockdowns, they are now 27% higher than they were before the pandemic.
So what are the main reasons why over 12,000 companies in the same sector have gone into an administration, CVA or liquidation in the previous four years?
There are many factors to consider but the most common reasons we have seen in directors statements and administrators reports include the following:
- Supply chain issues both in the UK, EU and world-wide
- Late payments from suppliers
- Project delays and reduced income from fixed price contracts
- Rising costs including materials and labour
- Market demands changing
- Tax changes – IR35 regulations changed in 2021 making construction firms responsible for making sure their contractors are paying the correct tax amount
- VAT changes – In 2021 responsibility for paying VAT on certain services moved from the supplier to the customer disproportionately affecting construction firms
- Building regulation changes – Following the Grenfell Tower fire in 2017 and others there were new fire safety and cladding rules introduced. These have increased costs for constructors that have struggled to absorb these, especially smaller ones
Bounce back loan defaults are up for construction businesses
Construction companies have also been susceptible to bounce back loan defaults as their failure rate has increased.
We reported in January that over 40,000 construction businesses have defaulted on their bounce back loan repayments in the previous two years, which is 15% of all loans made to companies in the sector.
260,912 construction businesses took out bounce back loans from 2020 worth a combined total of approximately £7.68 billion.
These businesses are also vulnerable to the same cost increases that every other UK business is undergoing in April too.
Chris Horner, insolvency director with BusinessRescueExpert, said: “Bigger construction companies might have had some “fat” to absorb price increases in the past couple of years but this has now been reversed.
“If large or medium sized construction firms have to go into insolvency then the remaining businesses in the supply chain are often left with bad debts and holes in their project schedules as contracts are cancelled and they have to scramble to find new suppliers and contractors.
“Construction can be a sector where firms can make losses but still generate cash for a period so unless there’s a hard stop on activity, they can trade on until the situation turns around or look at administration or liquidation if not.”
While most construction companies already pursue good economic and social governance models (ESG) and try to maintain accurate records, financial forecasts and strong cash flow, they are not immune to external economic factors and events.
Because of the nature of their business, they are often quite exposed to even small changes which can have outsized ripple effects with the failure of one firm increasing in impact on the next one in the supply chain.
With an extended break coming up, this will be the ideal time for construction business owners and directors to take a breath from their intensive day-to-day duties to consider some impartial advice on what they can do to help protect and repair their business after a rough couple of years.
We offer a free initial consultation at a time of your choosing where one of our team of advisors can get a better understanding of the unique financial challenges your business faces.
They will then talk through the range of options available to you, which could be more wide ranging and effective than you thought.
Find out what you can do to build your construction business back stronger than before – get in touch today!