29 January 2024 , 08:59
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The UK construction sector is facing a tough time as 4,370 firms have gone bust over the past year.
This data shows that the industry has seen the highest number of bankruptcies in the UK for the last three years. According to auditing firm Mazars, there was a 7% increase in insolvencies from 2021/22 and a whopping 76% increase from 2020/21. This is due to high costs for materials and labour.
Mazars also highlighted that rising borrowing costs have hit profit margins for ongoing and future development projects. Plus, with mortgage rates at a 15-year high, consumer confidence has taken a hit, leading to a drop in house prices after recent dramatic increases.
Mark Boughey, a partner at Mazars, said: "There are now on average a dozen building companies going under every single day in the UK. This is an immensely difficult period for the construction sector. 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."
He added: "Construction contractors operate on very tight margins at the best of times the sector is really being squeezed at both ends right now." Over the past year, most bankruptcies in the building industry were due to specialised tasks like demolition, electrical work and plumbing, making up 58% of all bankruptcies.
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A respected construction company, Kenham Building, recently went bust because of financial losses on a home refurbishment project that faced technical groundwork issues, leaving all staff without jobs. On January 9, business advisory firm ReSolve was appointed as joint administrator of the construction company that focused on high-end residential buildings.
Chris Farrington, a partner at ReSolve, said: "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. 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."
Mazars now predicts that troubles in the sector will continue through 2024/25. Mr Boughey said: "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."
Mark Allen, chief executive officer of the UK's largest property development company Landsec, said: "Inevitably, when you go through cycles such as the one we are in the moment and you see very rapid inflation in costs that squeezes margins all the way through the supply chain, that can catch some people out."
He emphasised the importance of Landsec planning ahead for tough periods and said that it is "normal" for firms to enter insolvency."I think it does make it even more important for us and people like us to make sure we understand the expertise, the financial capacity of the supply chain that we're working with," he added.
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]