Construction businesses continue to face pressure as insolvency levels remain high

The construction sector has always operated in a challenging environment, balancing tight margins, complex contractual relationships, and significant cash flow demands. While many of the supply chain issues and material shortages seen in recent years have eased, financial pressures across the sector remain significant. 

Construction accounts for around one in six company insolvencies in England and Wales: recent reports put its share at 16–17%. This compares with an estimated contribution of approximately 6% to the UK economy. Latest construction insolvency figures; Recent annual insolvency share; Estimated economic contribution.

These figures provide context rather than a like-for-like measure of insolvency risk: insolvency shares count companies, while economic contribution measures value added, and the geographical coverage differs.

Financial difficulties rarely arise because of a single event. More often, they develop gradually through a combination of squeezed margins, delayed payments, underperforming contracts and increasing operating costs. By the time these issues become visible in the headline figures, the business may already be under considerable strain. Construction businesses that recognise these warning signs early are often in a much stronger position to protect profitability and preserve future options. 

For construction businesses, understanding the early warning signs and acting before problems escalate is critical. 

Why are construction businesses still under pressure? 

Many construction businesses continue to face a difficult trading environment. 

Labour costs remain high, competition for skilled workers continues and many firms are operating on contracts secured in a very different economic climate. Where projects were priced on slim margins, unexpected cost increases can have a significant impact on profitability. 

At the same time, payment delays remain a persistent challenge. Businesses are often required to fund labour, materials and subcontractor costs well before income is received. Even a profitable contract can create serious cash flow pressure if payments are delayed or disputed. 

When several projects experience these issues simultaneously, the effect can be felt across the entire business. 

Cost pressures have evolved, not disappeared 

While material inflation may have moderated compared with the peaks seen in recent years, many construction businesses continue to face rising employment costs, increased regulatory requirements and ongoing pressure on profit margins. 

For businesses working on long-term or fixed-price contracts, even relatively small increases in labour, subcontractor or compliance costs can erode profitability. In some cases, contracts that appeared commercially viable at tender stage can become significantly less attractive as projects progress. 

This makes regular project reviews increasingly important. Directors should ensure that contract performance, forecast profitability and cash requirements are assessed throughout the life of a project, rather than relying solely on assumptions made at the outset. 

In challenging market conditions, understanding which projects are generating value and which may be exposing the business to risk can be the difference between maintaining stability and encountering financial difficulties. 

Looking beyond turnover 

One of the biggest misconceptions in the construction sector is the belief that a strong order book automatically means a healthy business. 

Some businesses experience financial difficulties despite having plenty of work. The key question is not how much work is being secured but whether that work is generating cash and profit. 

Construction businesses should regularly review: 

• Project profitability 

• Gross margins by contract 

• Cash collection performance 

• Aged debtor balances 

• Retention levels 

• Forecast cash requirements 

A growing pipeline of projects may appear positive, but if margins are declining or working capital requirements are increasing, underlying financial pressures can quickly emerge. 

Contract management remains critical 

Strong contract management can play a significant role in protecting profitability. 

Before entering into any contract, businesses should understand the commercial and financial risks involved. Attention should be paid to: 

• Fixed-price provisions 

• Payment terms 

• Retention arrangements 

• Variation procedures 

• Liquidated damages clauses 

• Notice requirements 

Once a project is underway, robust administration is equally important. Variations should be recorded promptly, payment applications submitted accurately and contractual deadlines monitored carefully. 

Small administrative issues can often lead to disproportionately large financial consequences. 

Watch for warning signs on individual projects 

Financial distress often starts at project level before affecting the wider business. 

Directors should monitor contracts for signs such as: 

• Declining forecast margins 

• Unapproved variations 

• Rising subcontractor costs 

• Delayed certification of works 

• Increasing disputes over payment 

• Extended completion dates 

Addressing these issues early can prevent project-level challenges from becoming company-wide problems. 

Seek advice sooner rather than later 

One of the most common themes seen in business recovery situations is that directors wait too long before seeking advice. 

In many cases, businesses remain fundamentally viable but require support to address short-term pressures, improve cash flow management or explore restructuring options. 

The earlier advice is sought, the more potential solutions are available. Waiting until cash reserves have been exhausted or creditor pressure has intensified can significantly reduce those options. 

How PKF Francis Clark can help 

Every construction business faces different challenges and there is rarely a one-size-fits-all solution. 

PKF Francis Clark’s Restructuring team works with construction companies across a wide range of circumstances, from improving financial visibility and managing stakeholder relationships through to refinancing, restructuring and formal insolvency procedures where necessary. 

The key message is simple: if concerns are emerging, act early. Identifying and addressing issues before they become critical can make a significant difference to the future of the business.