The latest official figures from the Insolvency Service show that 471 construction companies collapsed in May, a new monthly record.
Construction-related insolvencies in May were up 65% from April and 34% from May 2022.
Jeremy Whiteson, insolvency and restructuring partner at UK law firm Fladgate, said the May figures – published by the Insolvency Service yesterday (July 18) – “show a worrying position for the construction industry”. .
He added: “More and more problems arise in construction projects. This is perhaps not surprising, as interest rates make financing costs more expensive; tight labor markets and commodity supplies impact development costs and schedules; and demand from home buyers declines, causing prices to fall.”
Allan Kelly, restructuring advisory partner at FRP, said: “These insolvency figures are the result of a perfect storm of punishing headwinds to the economy combined with the lagged effects of prime contractor insolvencies in early 2023 now working their way through supply chains.
“Our own data shows that construction was the UK sector with the highest number of insolvencies in the second quarter of this year and, with around 23,000 construction firms showing signs of distress, it remains the more challenged. In part, this is because companies are particularly vulnerable to increases in underlying project costs, which are compounded by rising interest rates, sometimes so much that they simply become unviable.”
labor costs
Labor cost is a major issue of business survival. A new forecast from the Building Costs Information Service (BCIS), published on Tuesday (July 18), indicated that labor costs would overtake the cost of materials as the biggest challenge facing building firms. construction
In its latest quarterly construction inflation data briefing, BCIS predicted a 10% rise in labor costs over the next 12 months as high inflation and the cost of living crisis continue to weigh on wages
BCIS chief economist David Crosthwaite said: “Work rates continue to rise faster than wage awards. We expect a period of recovery, with people demanding pay rises to help offset some of the rises of prices that we have seen in the rest of the economy.
“It’s also important to remember that while material cost increases are slowing, levels are still significantly higher than three or four years ago.”
Another factor contributing to construction insolvencies is the inability to pay back government-issued Covid loans, with an increase in winding-up applications brought by HM Revenue and Customs (HMRC).
“It is a cause for concern if a more aggressive approach by HMRC to debt collection is killing viable (albeit struggling) businesses,” Whiteson said.
Nick O’Reilly, director of restructuring and recovery at MHA, called for a reform of the terms of the repayment of the loan from Covid. He argued: “The restructuring of the repayment terms of the Covid-19 support will allow companies to have more time to pay and allow them to internally restructure their commitments. The additional government help for companies with outstanding loans from Covid-19 will further help them allocate resources efficiently and survive this economic downturn.”
Kelly added: “Right now, management teams need to be incredibly vigilant for any gaps in their own or their customers’ operations and supply chains. Quick and proactive action means more time to work with stakeholders and creditors to plan a recovery.”
Figures from the Office for National Statistics show that the total number of active construction firms rose from just under 200,000 in 2014 to around 375,000 in 2022.
But since 2019, Crosthwaite noted, the global construction workforce has shrunk by 181,000. “The volume of this decline is significant,” he remarked.
“What’s interesting is that, while the number of insolvencies has increased and the number of workers has decreased, the number of firms and labor productivity appear to be increasing, suggesting that the industry is becoming more efficient”.
In August, the Insolvency Service will publish sector-specific data for June 2023. Across all areas of the economy, a total of 2,163 companies went bankrupt last month.
