Sub-contractors continue to “bear the brunt” of a downturn in construction activity across different sectors – with smaller firms currently overrepresented in recent insolvency figures.
Slowed activity in new housebuilding and repairs, coupled with major infrastructure delays, could mean more heartache for smaller companies in the supply chain in the next year, who will absorb the impact of project cancellations or rephasing, a leading expert has warned.
Construction Products Association (CPA) economics director, Noble Francis, said the “greatest concern” for the construction industry is that the downward trend in private housebuilding and repair and maintenance activity continue in 2023, particularly when taken with the effects of delays to HS2 and Euston station and the UK Government’s New Hospital Programme, as smaller, specialist firms are likely to be the worst affected.
It comes amid recent findings by The Insolvency Service, which showed of the 471 construction firms that went out of business in the UK in May this year, 280 were smaller companies.
Data also revealed more than 4,200 construction companies in the UK collapsed in the year to May, a nearly 17% increase on the previous recorded year.
And while specialist sub-contractors made up the majority (almost 60%) of construction firms that went out of business in May this year, 170 were in fact main contractors.
However, Francis also pointed out in the event of a downturn in construction activity, “main contractor business models” push costs and risk onto their supply chain.
This is compounded by an oftentimes sluggish planning system, soaring inflation, high materials costs, a widening skills gap, and reverse charge VAT concerns – though Tier 1 firms are not entirely immune to these effects either.
He warned of even harsher headwinds for sub-contractors in the next six to 12 months if construction activity falls further this year.
For the past five months, the number of insolvencies has fluctuated but remained high, in most cases surpassing 2022 figures:
- January: 292 (318 in Jan 2022)
- February: 333 (308 in Feb 2022)
- March: 445 (421 in March 2022)
- April: 284 (382 in April 2022)
- May: 471 (351 in May 2022)
“We are starting to see the sharp downturns in the two largest construction sectors, private housing and private housing RM&I (repair, maintenance & improvement), feed through plus the impacts of government’s announced delays to infrastructure projects, such as rail contractors having to down tools at Euston station and delays and cancellations to road projects,” Francis wrote on social media.
“The largest impacts were on the smaller, specialist sub-contractors…as major house builder and main contractor business models are based on pushing cost, activity and risk onto the supply chain so if there is a sharp downturn (or government announcements of project delays) then specialists bear the brunt of it.”
Francis added: “Clearly, the greatest concern is that housing (new build and RM&I) activity will fall further this year whilst the government’s recent announcements of delays to roads and rail projects (plus further delays on school and hospital programmes) will increasingly affect activity and contractors’ financial viability, primarily smaller, specialist sub-contractors, in the next six to 12 months.”
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