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There seems to be no shortage of building work in progress around our local offices. When I am driving to see clients in Leicester and Northampton, I regularly pass industrial developments, commercial buildings under renovation, and new housing communities. Even the slightly more rural and complex building and development areas like Warwick and Leamington Spa are commercially active with new domestic and business building and rejuvenations happening around the county. So why, if there are so many projects happening, are there so many insolvencies?
The UK construction and building development sectors are currently grappling with a significant increase in insolvencies, a trend that has intensified over the last few months. To give some historical context, in July to September 2023, there were 6,208 registered company insolvencies across all sectors. A significant portion of these were attributed to the construction industries. The building and development sector alone accounted for 16.9% of the total number.
As I am sure we all remember, the economy wasn’t exactly rosy during that period. The Bank of England (BoE) was taking a pretty aggressive stance to fend off the challenge of rising inflation. That resulted in higher borrowing costs and more cautious investors. There were also issues around supply chain disruptions, increased fuel costs, energy price hikes, the skills gap left as a result of the end of free movement, completion delays, and several other factors, including the aftershocks of the Covid effect. Reduced consumer spending slowed demand for developments as did the reduced business confidence.
The economy stumbled and stuttered along in 2023, and that is not a good environment for any business, particularly the building industry. Unsurprisingly we saw a rise in insolvencies as more as more developers and builders faced cost rises in an already tough financial landscape.
Sadly, although the economy has stabilised a little, the insolvency trend has continued into 2024. The construction and building development industry consistently features high on the list of company collapses. The figures from the Insolvency Service tell us that in July 2024, the sector saw nearly 400 insolvency registrations in England and Wales alone. This is a marked increase from previous months. As each of these insolvencies adds to the flood, they affect the wider industry landscape of course, via bad debt and unfinished projects, as well as the loss of revenue for their suppliers.
Several factors are still contributing to the growing number of insolvencies in the construction sector. One driver is the continued high cost of borrowing. Interest rates may have fallen slightly, but that takes a while to benefit businesses. For many construction firms, the cost of financing ongoing projects has or will become, unsustainable despite the fall. This is particularly true of the SMEs who often simply do not have the borrowing power of larger corporates. As inflation remains high and the cost of raw materials and labour continues to rise, there will undoubtedly be further squeezing of profit margins. Sadly, these are the same profit margins that were already low as a result of the previous year of turmoil.
In short, the industry is vulnerable and, as the numbers show us, many businesses are too vulnerable to continue.
We need to be a little realistic here. There are some bright points on the horizon, the economy looks like it may take another upturn, the housing market seems to be more stable, and mortgage lending costs are reducing, albeit slowly. All these, along with some promised government building developments and business incentives may combine to hopefully, slow the decline.
For the short term though, there is no getting away from those insolvency numbers. High borrowing costs, coupled with rising inflation, and ongoing supply chain disruptions, are creating an environment where many firms may find themselves unable to avoid insolvency. Until things do get better it could well be a struggle for survival in the building development arena.
What should you do if you are struggling financially in the construction sector?
For anyone involved in the construction industry, it is more important than ever to closely monitor your financial health. A lot of the issues you will be facing are going to be outside your control. So, you need to fully understand not only where you stand now but where you will be in the future. Running possible scenarios is highly recommended in these circumstances. Make sure you have a handle on the actual situation as well as what could happen. Insolvency rarely appears overnight, and we often find there have been warnings for months before we see the directors of a business. It is vital you recognise the indications that you are going to struggle. When margins are tight, payment for completion is a long way off, and you are in a hostile marketplace, recognising the red flags when they appear could be the difference between survival and insolvency. When you do see them you must do something about them.
Knowing your numbers can be a double-edged sword. It can bring you the relief of knowing the cash is coming in, but it can also bring the harsh reality that you may not be going to make it. Either way, knowing the truth about your numbers and acting immediately is always the best option.
If you are in the construction industry and things look bad financially, we are here to help. Check out our help for directors information and call us for a chat. It’s not going to get better unless you take action.
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