Pressure grows on construction firms as insolvencies rise | Construction News

The number of construction firms facing significant financial pressure has risen almost 40 per cent over the past year, according to data from a leading insolvency practice.

Begbies Traynor’s latest ‘Red Flag Alert’ today showed 83,559 companies in the sector were facing “significant financial distress”, up 38.6 per cent on the same quarter last year (60,275). A further 6,141 firms were now in critical condition, 27 per cent up from last year (4,826), the company reported.

The data was released on the same day that figures released by the government showed a 5.7 per cent rise in the number of construction firms tipping into insolvency in the year to February.

Begbies Traynor partner Julie Palmer said: “The higher levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.”

Justin Matthews, financial advisory partner at fellow insolvency firm FRP, said: “Our own data suggests that more than a third of UK contractors are concerned about their ability to still be trading come the end of the year, with two thirds admitting that they will struggle to pay their tax liabilities or any outstanding tax in full this year.”

The rise in construction firms in significant financial distress compared to a 30.8 per cent rise in the number of across the wider economy, according to the Begbies Traynor report.

Palmer said: “Despite some optimism as we entered the new year, 2024 has so far been characterised by a continuation of the same pressures that plagued companies in the UK throughout 2023.

“Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt, which for many may simply be too great to bear.”

Historical data indicates that a large percentage of the businesses currently in “significant” financial distress are “likely to head towards ‘critical’ financial distress and potential insolvency” without an improvement in economic conditions, Begbies Traynor said.

Meanwhile, data released by the government’s Insolvency Service showed 4,403 firms became insolvent in the 12 months to February, 5.73 per cent up on the year to February 2023 (4,164).

Jo Streeten, managing director of building and places at consultancy Aecom, said high interest rates were continuing to reduce the amount of new work in construction.

While materials inflation has receded in recent months, Streeten said that “sustained wage growth remains a threat to margins despite firms having adjusted their pricing models”.

She added: “To avoid any domino scenarios it’s critical that supply chains continue to be transparent in their capacity to deliver work and that the industry maintains its commitment to fair payment terms between contractors and subcontractors.”

Kelly Boorman, national head of construction at RSM UK, said that although firms’ work pipelines were full, supply chain firms had been hit by continual changes to project start dates.

“This is adding additional pressure to the supply chain and its workforce,” she said. “The uncertainty of start dates and volume of work is making for an unstable environment, and it is difficult for businesses to predict their working capital needs.”

Matthews said that while HMRC is willing to make arrangements for the repayment of tax liabilities, “it won’t enter into these lightly”.

He said: “Good preparation, valid reasoning and proposing a reasonable repayment plan are all key to increasing the chances of securing some much-valued recovery room.”