During the first three months of the year, 730 construction businesses went bust, rising 8.8% quarter on quarter and 8.6% year on year.
This is the highest number of insolvencies reported within the construction industry since Q1 2014, according to the Insolvency Service, and is a far cry from Q4 2015 when the number was at its lowest level in seven years at 562. Of the 730 businesses, specialist construction service failures rose by 11% whilst insolvencies in engineering came to 47, an increase of 4% compared with the same period last year.
The figures paint a bleak picture, nonetheless, prospects for the rest of the year and 2018 are unlikely to improve with Brexit uncertainty, which has caused the fall in the value of sterling and will continue to challenge the industry as there are mounting concerns as to how the outcome of the EU referendum will affect construction firms, given their reliance on European labour.
Additionally, the shortage of infrastructure projects being funded by the austerity-led government and the strong possibility of an interest rate rise before the end of the year, make it highly likely that things are likely to get worse before they get any better.
Common Causes of Insolvency in the Construction Industry
One of the major triggers of insolvency in construction is unprofitability since there are a large number of firms in the industry, the process of winning contracts is highly competitive and price sensitive. Data shows that the industry’s largest contractors were making little progress on margin, with the larger players actually losing money. In their efforts to maintain business viability, keep staff employed, many construction firms take on new projects with narrow profit margins and over-deliver to retain the client’s business in an aggressively competitive marketplace. Although this course of action is completely understandable, it’s unsustainable as maintaining healthy cash flow is crucial to business survival and companies need to ensure that all work is as profitable as it can be.
The rise in insolvencies within the sector can be chalked up to cost increases, with some firms unable to manage spiralling labour and material costs, particularly on contracts won a number of years ago. Federation of Master Builders Chief Exec Brian Berry echoes this: “Rising material prices and growing skills shortages dampened growth among construction SMEs in the final three months of last year. The optimism that we saw from small construction firms during most of 2016 has now dropped off because of growing concerns about rising costs”.
Late payments and bad debts are also key triggers of insolvency in business, including the payment of tax arrears. Last year’s Subcontracting Growth Survey found that more than a quarter (27%) of contractors believed that late payment from main contractors would be the biggest challenge that they would face in 2017. Delayed payments and bad debts are ongoing problems within the building and construction industry, with firms being forced to wait up to 120 days for payment on work completed, which can prevent profitable firms from moving on to the next job and growing their business.
Formal Insolvency Solutions
There are three options that allow construction firms facing insolvency to continue to trade.
- Directors can contact the company’s creditors to try to reach an informal agreement on repayment
- Use a Company Voluntary Arrangement or CVA to pay creditors over a fixed period
- Place the company into administration, which offers the firm some respite from creditor action and enables the company to continue trading and its assets to be sold.
There is also the option of winding up the company. This is where the company is closed and its assets are sold and distributed to creditors.
High Profile Insolvencies in 2017
In May, Land Engineering collapsed into administration, which resulted in the loss of 135 jobs. The Glasgow-based landscaping and civil engineering firm were struggled, like many of its competitors, with profitability. idverde, the UK’s largest landscaping and grounds maintenance service provider, acquired the services, responsive and winter divisions from Land Engineering for an undisclosed sum, saving 249 jobs. However, the administrators were unable to find a buyer for the remainder of the business and 135 employees have been made redundant.
In October, north-east construction firm Owen Pugh called in the administrators as a result of cash flow problems from a number of large and high profile, yet loss-making projects. The long-standing company, which had been in business since 1946, had sites in Dudley near Cramlington, Blaydon on Tyneside, Stockton-on-Tees and Sunderland.
In recent weeks, Owen Pugh was served with winding-up petitions that the company was unable to satisfy. Latest results from March 2016 show the group made a pre-tax loss of £364,000 on turnover of £36.7m. The administration has put 300 jobs at risk. However, the administrators are confident of finding a buyer for the firm or parts of the group and a number of potential buyers are understood to be interested.
There are also major concerns regarding some of the larger players within this sector. In March, Mitie reported a loss of £194m together with 3,000 jobs. In the year to December 2016, Interserve Plc lost over £100m and is also likely to breach its banking covenants, putting its future in doubt. Carillion Plc has also announced profit warnings, with a dramatic fall in its share price.
Seek Professional Help
As a director of a business operating within the construction industry, it’s vital to seek professional advice at the first sign of financial distress as this will provide more options and the best chance of recovery. For free and confidential advice from one of our professional advisers, please call 08000 746 757 or email [email protected]