Construction companies face pressure amidst increasing insolvencies

Construction has always been a high risk industry, often appearing on the list of industry sectors most likely to become insolvent. For the year to the end of February, construction appeared at the top of the list by some margin.

The industry has faced several challenges over recent years. Since the pandemic, there have been many factors which have caused real problems:

Supply chain issues. It has been extremely difficult to procure materials and the cost inflation rate has been high
There is an ongoing shortage of skilled labour and a tightening of immigration controls has further put pressure on supply
Interest rates have increased which adds to finance costs and financial pressures

Red Flag (a business monitoring service) estimates that of the roughly 99,0000 construction related businesses in the UK, 6% are in critical financial distress.

How to reduce risk

One of the features of construction in the UK is a contractual system which needs careful management to avoid risk.

Industry standard form contracts are long, complex and highly specified. They may include fixed price and significant penalties for time delays. Given procurement issues and labour shortages, companies can find themselves locked into financial penalties for reasons and delays beyond their control.

We have come across companies who, in times of downturn, have quoted for work at little or no margin. The logic being to retain work for their skilled workforce in anticipation of better times. If something goes wrong on such a contract, they can become materially loss making and sometimes threaten the existing of the contracting company.

Another important aspect is to get the paperwork right, not only in terms of following to the letter of the contract in terms of timing and detail of valuations and payment requests. In addition, carefully ensure the work being done is fully in line with the contract specification. If there are any variations to this properly recording this and notifying the employer of the additional cost that will be charged.

If disputes arise, use the contractual mechanisms (such as adjudication) to address them in suitable time.

If the pressure is too much?

Formal insolvencies of construction companies rarely lead to a positive result. Not just for the company itself but for employers and sub-contractors left licking up the pieces.

If you feel the pressures are rising, seek advice early. To get in touch with our business restructuring team, click here.