The insolvency risk within the construction industry
The construction industry is currently facing renewed concerns regarding the number of firms at risk of insolvency, especially in the wake of the recent Carillion collapse. Recent insolvency statistics reported that the construction industry has the second highest number of total liquidations per industry each year.
The challenges that the construction industry faces is down to a number of factors. In this article, the team at RJ Lifts delve deeper into the insolvency issues within construction whilst outlining potential businesses recovery strategies.
The insolvency statistics from 2017 show an increase in overall company insolvencies in the UK, particularly voluntary liquidations. This actually accounted for the largest number of insolvencies in the UK, with a figure of 12,861.
The construction industry saw 2,633 companies experience insolvency during 2017. The number of construction businesses facing insolvency has also seen a 0.5% increase annually.
In 2017, the sector recorded many important issues, leading the press to conclude that over a quarter of construction firms in the UK are likely to hit insolvency by 2020.
Insolvency cases in construction
As mentioned, the Carillion collapse is by far the most notable case of compulsory liquidation within the construction industry. Back in July 2016, Carillion projected a market value of £1 billion, spreading into Canada, the Caribbean and the Middle East.
The business had a huge number of employees – 20,000 in the UK, and 42,000 globally. However, as business began to expand, many of the contracts they secured became unprofitable.
The initial stages of the collapse came to light in 2016, with three profit warnings issued later the same year. The market value of the company therefore dropped to £61 million, partly down to the investigation by the Financial Conduct Authority (FCA) regarding their HS2 contract.
Another case involves B&Q, the UK’s leading DIY chain. Although not currently facing insolvency, they have experienced a steep decline in profits. Kingfisher, owners of the construction store, advised that direction of the chain was “uncertain”, as they disclosed a 9% drop in shares. The rise in interest rates last November had also been suggested as a possible effect on the companies stability.
Carpetright have also recently announced their new business recovery plan and are considering a company voluntary arrangement (CVA) to close all unprofitable stores and therefore cut down on rent costs.
Why are construction companies facing insolvency?
Insolvency rates in the UK within construction have always been high, with several reasons backing this up.
Bad debts and late payments are the main trigger for such insolvencies. Tax payments also leads to an overwhelming number of firms seeking business recovery plans. Whether it be paying tax in one lump sum, making several payments at a time or incurring penalties, these can all contribute to a company’s overall cash flow.
If VAT penalties aren’t paid in full or by arranged payments, it can lead to devastating consequences. Not making these payments indicates financial issues to HMRC, and you may incur a default surcharge notice.
HMRC grant times for a company with their first late payments, and smaller businesses are treated with more leniency compared to larger establishments, but if you do fall behind with payments, the HMRC business payment support service must be immediately informed.
There are two options for firms who are unable to pay VAT liability:
- HMRC time to pay agreement
- Attempt to negotiate a settlement if the above cannot be agreed
Construction output in the UK amounts to more than £110 billion per annum, contributing 7% of GDP. Therefore, we find a lot of competition in the sector regarding large-scale projects. With a large amount of construction firms competing for jobs, work if often price sensitive. In various cases, charging lower prices may seem the best option in order to gain a contract.
The rise in construction businesses has also caused many employers to look for more experienced contractors, benefitting larger companies but leaving the smaller firms without a profit.
Due to the increased number of construction industry insolvencies, suppliers and clients contractors either fail to receive or make payments, resulting in cash being owed to various external creditors.
As such, construction firms tend to have much bigger debts, which can affect their ability to get credit. The shortage of capital assets can mean that credit are at high-rates when looking for business support.
Construction Industry Scheme (CIS) Arrears
The Construction Industry Scheme (CIS) outlines the takings firms receive from a subcontractor’s payment, which is passed on to HMRC. Every construction business must verify their own CIS regulation, deduct the appropriate amounts and submit payments to HMRC, as well as monthly statements to subcontractors.
However, if the payment is withheld, HMRC will act quickly. If you’re able to pay immediately, no further action is usually taken. Otherwise, an agreement will have to be negotiated, similar to that of a VAT penalty.
Communication with your creditors
Consideration must be given in the interest of your creditors, especially for those experiencing cash flow issues. By having an open communication with your creditors early on, it makes it possible to put relevant agreements in place that will allow you to spread payments and avoid facing insolvency procedures at all.
For example, informal arrangements costs much less to implement and ultimately, it is in your creditors’ interests that the company in successful. Similarly, CIS or VAT arrears don’t necessarily have to mean your business is over. However, ignoring such problems will affect the durability of your firm.