The construction sector is experiencing the highest number of insolvencies of any industry in the UK with around a dozen building firms going under every day, fresh data has revealed.
Around 4,370 companies collapsed in the year to 30 November 2023 according to Insolvency Service figures, representing 17 per cent of all insolvencies during that period.
Construction insolvencies have also consistently outnumbered any other sector for the past three years, according to Mazars Accountants, with 2022/23 figures showing a 7 per cent increase from the 4,086 companies that went under in 2021/22 and a 76 per cent rise from 2,481 in 2020/21.
Mazars said the sector had been hit hardest by a “perfect storm” of high material and labour costs.
“The impact of rising borrowing costs has further impacted profit margins on both live and pipeline development projects,” said Mazars. “2023 saw mortgage rates reach a 15-year high, putting a dent in consumer confidence and taking the heat out of the dramatic price rises in residential housing over recent years.”
Other contributing factors include a downturn in construction activity, project cancellations or rephasing, an oftentimes sluggish planning system, soaring inflation, a widening skills gap, fixed-price contracts and reverse charge VAT pressures, to name a few.
Specialist firms, such as demolition and MEP contractors, were the biggest causalities in the sector over the last twelve months, representing 58 per cent of all insolvencies, consistent with previous reports on the impact on the supply chain.
Business advisory firm, ReSolve, was recently appointed the administrator of London-headquartered residential builder, Kenham Building Limited, which collapsed after it encountered “significant” technical groundworks issues on a large refurbishment project.
“It is unfortunate to see a business with a strong trading history, and a portfolio of superb construction projects completed over the course of many years, encounter the difficulties experienced by Kenham Building,” said ReSolve partner, Chris Farrington.
“It is also particularly regrettable that staff were not able to be retained through this process, a reflection of the extremely challenging conditions being experienced not only by Kenham but the wider construction and homebuilding sector.”
Construction firms in the UK have gone under at the highest rate in a decade. Yet the UK construction sector still contributed 6 per cent to the country’s GDP in 2022.
“There are now on average a dozen building companies going under every single day in the UK,” said Mark Boughey, partner at Mazars. “One problem is that the commercial viability of a lot of today’s projects were assessed three or four years ago, with fixed price contracts often being negotiated – since then, costs have spiralled, while buyers’ appetite has taken a dive.
“Construction contractors operate on very tight margins at the best of times – the sector is really being squeezed at both ends right now.”
He added: “We saw a number of bigger contractors filing for insolvency 12 to 18 months ago and now those failures are being felt downstream in the supply chain. Sub-contractors aren’t getting paid on time or to the agreed levels and, as a result, are now starting to experience their own financial problems.
“The impact of failures in the sector cuts both ways though – when smaller companies fold, it can cause major delays for the main developers in completing projects.
“Whilst some of the headwinds around increasing borrowing costs and material prices have eased, we’re unfortunately likely to see these difficulties persist through 2024 and into 2025. This is an immensely difficult period for the construction sector.”
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