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Paper house on cracked earth | AccountingWEB | Insolvency spike reveals cracks in construction sector
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Insolvency spike reveals cracks in construction sector

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Despite falling inflation and a short-lived recession, the number of companies plunging into insolvency still increased by 18.4% in April compared to the previous year, with the construction sector bearing the biggest brunt.

17th May 2024
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The Insolvency Service reported today 2,177 company insolvencies in England and Wales during April, driven mostly by the ongoing increase in creditors’ voluntary liquidations (CVLs), with the majority of those relating to small and medium sized companies.

The number of insolvencies recorded in April is 18% higher than the figure reported in March and 18% more than the previous year, when there were 1,838. 

The insolvencies in April consisted of 1,715 creditor's voluntary liquidations, 300 compulsory liquidations, 144 administrations and 18 company voluntary arrangements.  

The numbers of all types of company insolvency were higher than in both April 2023 and March 2024. 

Construction hit the hardest

The construction sector experienced the highest number of insolvencies above any other sector in the 12 months to March 2024. 

During that 12 month period, the construction industry amassed 4,274 insolvencies. The next sector suffering the biggest impact from insolvencies was wholesale and retail trade including the repair of motor vehicles and motorcycles - this sector saw 3,766 cases. Not far behind that was the accommodation and food service which reached a total of 3,766 cases. 

The gap starts to widen from there, with administrative support service activities at 2.312 cases and professional, scientific and technical activities at 1,979. 

Explaining why the construction is feeling the biggest impact Kelly Boorman, national head of construction at RSM, said many within the industry are still recovering from legacy contracts procured as fixed cost contracts pre-Covid and subject to litigation. 

“The industry has been seriously impacted by inflationary rates and labour costs, especially in the last year. This, coupled with an accelerating pipeline, is causing additional challenges as there isn’t the availability of working capital for businesses to carry out work, which is a key contributor to rising construction insolvencies,” explained Boorman. 

“The industry has been seriously impacted by inflationary rates and labour costs, especially in the last year. This, coupled with an accelerating pipeline, is causing additional challenges as there isn’t the availability of working capital for businesses to carry out work, which is a key contributor to rising construction insolvencies.”

With squeezed supply chains, legacy contracts and the risk of overtrading rising, Boorman expects to see construction insolvencies continue to accelerate into the quarter. The plight of the construction industry is further hampered by political uncertainty and a looming elections which is leading to concerns around supply chain and the availability of government contracts. 

Retail and hospitality are not far behind construction, with these businesses potentially showing the impact of a tough Christmas trading period and the cost of living crisis.  

Behind the numbers

The rising insolvencies come against the backdrop of the UK briefly entering a short-lived recession earlier this year, but despite falling inflation and hopes that the Bank of England will soon start cutting interest rates, company insolvencies remain at a record high. 

Tim Cooper, the president of insolvency trade body R3, said the current situation is more nuanced than just blaming the pandemic, inflation and interest rates. 

 

He said the increase in creditor’s voluntary liquidations could be down to directors closing their business at the end of the financial year because they don’t see the market improving or have just had enough. The other explanation could be the difficulties small businesses are having in accessing more complex and more expensive forms of restructuring, opting instead for liquidation to deal with “unserviceable debt”. 

There are some signs of recovery. Cooper pointed to the increase in administrations, which isn’t a large number, suggesting that there are an increasing number of businesses that could potentially be rescued rather than wound-up. He added that as the economy improves, the trend will likely continue.  

Elsewhere, he believes liquidations will level out or decline as rescue mechanisms begin to replace closures.

“Despite the difficult business climate over the period these figures cover, there is some cause for optimism. The economy is growing again and business and consumer confidence are both improving, and while businesses remain concerned about costs and consumer demand, the mood is generally more positive with a significant increase in new company registrations being reported by Companies House.”

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By FactChecker
17th May 2024 23:46

I know this is only relatively light-hearted journalism but the dearth of hard facts makes it hard to tally the views of experts and what many of us see/encounter.

"Explaining why the construction is feeling the biggest impact Kelly Boorman, national head of construction at RSM, said many within the industry are still recovering from legacy contracts precured as fixed cost contracts pre-Covid and subject to litigation."

Assuming that 'precured' is really procured, there are not a lot of medium-sized (let alone small) builders who are still working to deliver contracts signed 5 or more years ago.
As anyone will tell you that's tried to hire builders for medium/large-sized construction jobs (from digging-out another floor to 2-storey extensions or barn conversions and so on) the difficulty is finding any sufficiently interested to quote.
So it appears to be the supply-side that's failing and, whilst cost of materials has sky-rocketed in recent years, that hasn't dampened the demand-side; the throttling factor is insufficient trained workers (with relevant specialist skills) willing to work for an affordable 'wage'.

Golden handcuffs / bonuses (even bribes) are no longer restricted to the purlieu of the City ... skilled trades people now expect and demand such treatment - and it is this which is causing many bosses to give up.

My suspicion is that very different factors are at play in retail, and no doubt within each different sector, but we'll never know just by looking at headline insolvency figures.

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By johnjenkins
23rd May 2024 09:59

House building has reduced by 25% which hasn't helped. I keep harping on about it but the economic climate has caused a "stagnation", which, if not sorted, will continue for a couple of years. The squeeze on the small business will, eventually, lead to pre Maggie Thatcher days.

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By jon watkin
23rd May 2024 09:59

There is no let up in the demand for skilled tradesmen, especially plumbers and joiners but it's not in the new builds, it's for maintenance of existing homes and improvements as potential buyers stay put. Many new build sites appear to be mothballed or homes built up to foundation level only. For subbies on site, not only is there a dearth of work but they are competing with lesser skilled jacks of all trades always willing to do it cheaper, but likely not better. On the demand side, the fixed mortgage rate timebomb, the lack of affordable mortgage products, job uncertainty and risk averse mortgage providers will be likely dampeners. It's certainly a double whammy for construction firms and the trades that supply them, at the moment.

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