The UK’s construction industry has been at or near the top of insolvency statistics in 2023. The sector has seen record levels of businesses folding – more than 4,000 in Q3 2023, or 18% of all cases in an identifiable industry – amid surging inflation and a 15-year high in interest rates.
Optimists are convinced the worst has passed: housebuilders in particular are expecting a significant easing of mortgage rates, while workloads for contractors appear to be growing. Nonetheless, construction liquidations and administrations are still coming thick and fast, leaving a trail of destruction in related industries. There are countless examples, including a previously profitable ‘clean manufacturing’ engineering business in the North East that appointed administrators this week, citing the collapse of a key subcontractor and “pressures in the wider construction sector”.
Project management giant Turner & Townsend has highlighted that contractors consider their greatest challenge to be lack of confidence in the market to invest in new projects. This is followed closely by higher costs of construction and skilled labour shortages. Difficulties accessing credit appear to be less important. Others, however, point to a potential housebuilding boom if a Labour government follows a General Election in 2024, making good a promise to build 1.5 million new homes over five years. In addition, while interest rates stay at current levels for the foreseeable future, weak house prices and higher average earnings will make housing steadily more affordable – good news for project starts in 2024/25 as builders pick up tools in response to greater consumer confidence. Intelligence and analysis group Glenigan expects more than £35bn of residential project starts in 2025, around half of the total value of underlying (under £100m) new initiatives.
The public sector may, however, prove to be a major fly in the ointment. On one level, underspend by a number of government departments has helped to shore up public non-residential construction activity. Building and expanding schools has been a priority, as well as urgently addressing potential structural failures. The flip side in that local authorities face a worsening financial crisis and barely a day goes by at present when a major local authority hasn’t issued a Section 114 Notice restricting its spending to statutory obligations only. The boundaries of those will no doubt become more debatable as the cash crunch deepens.
One inescapable factor tempering optimism will be the scope for poor cash flow – notably for construction businesses, late payment and bad debts. Lumpy tax payments, which are common for the sector, compound the woe. These perennial features of the industry mean that many players, especially smaller ones, are never far from vulnerability. More often than not, the key to winning competitive tenders is being the cheapest, a model that larger operators can live with far better than minnows. Worse still, low single figure margins on large contracting projects are easily wiped out by poor estimating.
The very broad area of “wholesale and retail trade and repair of motor vehicles” was number two in the in the Q3 insolvency league. Next year may well eventually see sunlit uplands for UK construction, but Q4 figures for business failures are likely to show no change at the top.
Written by Anoushka Desai, Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.