Construction insolvencies have soared in recent years and are yet to return to pre-pandemic levels, five years on. Blighted by economic headwinds, sluggish post-pandemic recovery and rising labour costs, construction companies with little fuel in the tank are at breaking point.
We look at the current economic outlook for construction companies, key factors contributing to construction insolvencies, and problems synonymous with the UK construction sector. Chris Bristow, a company liquidation and business restructuring adviser at Real Business Rescue, examines the financial health of the construction sector.
Out of 22 industries monitored by Real Business Rescue’s Business Distress Index, construction has consistently experienced the highest financial distress levels among other major industries, including retail, hospitality and professional services. With an increasing number of businesses in a critical state, company insolvencies are inevitable.
The Business Distress Index tracks financial distress rates across key sectors and regions, with a particular focus on terminal businesses with deteriorating working capital, retained profits and net worth. Construction companies teetering on the edge of insolvency are highly vulnerable as they weather rough trading conditions and contend with low consumer sentiment.
The collapse of Carillion and ISG, both tier-one construction giants, is a testament to the mounting insolvency crisis in construction. According to the BCIS (The Building Cost Information Service), the total number of construction firms becoming insolvent in 2024 was 4,032, a 25.3% increase from 3,218 in pre-pandemic 2019. This paints a bleak picture for construction firms already in severe financial distress.
As building and labour costs increase and industry optimism plummets in response to the Autumn Budget, the insolvency risk is high for construction companies.
We look at what’s fuelling the insolvency crisis in construction.
The construction industry is experiencing a labour shortage due to a high rate of retiring workers, exacerbated by a low rate of young talent entering the industry. With ambitious housing plans and construction projects on the horizon for 2025, the skills gap must be urgently plugged.
With a change in the tax goalposts, such as the increase to Employer National Insurance Contributions, labour costs are multiplying. This means construction companies must either absorb the tax hike or consider offloading non-essential outgoings to create a cushion against rising taxes.
Poor cash flow due to delayed and late payments is notoriously common for British construction companies. While the industry is actively improving payment culture in construction, companies consistently subjected to late or missed payments risk buckling under the weight of unpaid invoices and bad debts.
The BCIS data shows that building costs will increase by 17% over the next five years, fuelled by record inflation. This increases the cost of doing business, including the cost of labour and materials which customers will have to inevitably absorb.
As the construction industry battles a combination of perpetual and contemporary problems, business models must evolve to minimise the impact of interruptions to cash flow, margins and reserves. Once this trio of financial factors are compromised, the risk of insolvency is high, albeit avoidable if professional and qualified insolvency support is sought early.
In this article we explore the UK construction sector’s outlook, key causes of insolvencies, and ongoing challenges facing the industry.
This blog explores how effective due diligence and credit risk management can protect businesses from financial risk, late payments, and cash flow crises.
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