Administration numbers down in June, but is the domino effect about to hit?

June brought a healthier headline number for administrations, but how will Henry’s demise affect the supply chain?

The number of construction business bankruptcies fell to 20 in June after a record 42 in May, but the second quarter of 2023 was the worst for administrations since Construction news began publishing Creditsafe data in January 2020.

The 91 administrations from April to June just surpassed the previous quarterly record of 90, set between January and March 2020.

“Some of the casualties are not entirely surprising,” said Brendan Sharkey, head of real estate construction at MHA Macintyre Hudson. “They’re undercapitalized and they just don’t have enough reserves to take a hit.”

June was most notable for the collapse of Henry Construction Projects Limited, which ranked 41st on the 2022 CN100 list of the largest contractors. Henry posted a turnover of £402.2m in its most recent accounts, which covered the year to 30 June 2021.

Its demise was the largest in the construction sector since the failure of NMCN in October 2021.

Henry focused on residential and mixed-use schemes, as well as hotels and student accommodation, in London and the South East. Examples include new homes (pictured) in Bromley by Bow, East London.

The administrators of FRP Advisory were summoned on June 8. They announced later in the month that most of Henry’s 40 employees had been laid off.

In May 2022, when his latest accounts were published, Henry owed creditors £120m within 12 months, with a further £13.3m due in more than a year.

Intelligence provider Glenigan’s database notes that Henry had awarded work to 89 subcontractors, so could the contractor’s collapse affect its supply chain?

“Rapid and broad-based inflation in construction has already squeezed margins and cash flow, even more so for [firms] working on a fixed-price contract, so default from further up the supply chain could be the last straw for an already struggling subcontractor,” said Rebecca Larkin, head of research at the ‘Association of Construction Products.

Sharkey said CN that there will be a “domino effect”. He said, “To Henry [collapse] it would have hurt people, no doubt. Henry was dealing with some fairly reasonably sized subcontractors. I’m sure these subcontractors don’t want to throw in the towel, but they’re probably going to have a hard time.”

Apart from Henry, four other companies on June’s list were large enough to have to submit revenue and profit figures to Companies House.

The biggest by turnover (£5.4m in 2021) was equipment supplier Adastra Access, which collapsed owing creditors £11m. A total of 38 workers have been dismissed.

Administrators of Interpath Advisory were appointed on 20 June. They claimed Adastra had encountered “trading losses and significant cash pressure”, due to a combination of labor shortages, rising costs and delays in client projects.

Merseyside-based paint specialist 1957 Capital Limited posted a turnover of £10.4m for the year ending 30 March 2021, although its accounts were overdue when it collapsed (along with its holding company) on June 6.

Land and civil works contractor GWKS Ltd appointed administrators to EY-Parthenon on 19 June. The firm counted ISG and Tilbury Douglas among its clients on projects in the south west of England, but its fortunes declined in recent years as turnover fell from £39m in the year it ended on 30 June 2020 at £29.8m a year later, and £27.6m last year. end of June 2022.

At the time, company executives stated that GWKS was operating “in a market with growing demand that presented us with many opportunities for new work,” despite “significant inflationary pressures affecting both labor and material costs.”

EY-Parthenon cited these pressures, in addition to supply chain issues, as the main reasons for the company’s collapse, which saw all 21 of its 109 employees laid off.

ME Developments (Castle Hill) Limited developed and built residential properties in London and its counties. Its website shows plans to develop high-rise flats in west London in Isleworth, as well as plans in Surrey.

The company’s most recent set of accounts, for the year ending 31 March 2021, showed a 73% rise in turnover to £6.21m. But its cost of sales also rose from £2.74m to £6.44m, making a loss of £221,505.

On 15 June a Shoosmiths administrator was appointed.

Although the month-on-month decrease in business bankruptcies looks encouraging, the macroeconomic data does not bring much joy. Research from Capital Economics still indicates a recession will hit by the end of 2023, the Bank of England raised interest rates by 0.5% on June 22 and ONS data released on June 30 show a GDP growth of only 0.1% in the first three months of the year.

With interest rates now at 5% and expected to approach 6% by the end of the year, Larkin said the cost of financing new projects had risen sharply for developers, customers, property owners and ‘buildings and investors.

As a result, he added, “there is even more reluctance to sign large projects in the commercial and industrial sector [construction]while moderate demand in the housing market is likely to last longer and housebuilders will slow down their activity”.

Sharkey amplified Larkin’s point by describing the housing market as “a mess,” especially given high mortgage interest rates. “At the moment there is no trust. Interest rates need to come down for the housing market to recover.”

Specialist trades remain busy and the infrastructure sector is doing reasonably well, he added, as its longer-term contracts are stable and the backlog looks better in 2024 than this year.

But construction companies face a double bind: it is difficult to borrow and at the same time, some of them are yet to repay CBIL loans. “There are several companies that are struggling,” Sharkey said. “They’re just trying to get to the end of the year with the hope of a brighter 2024.”