Construction BUSINESS

The UK construction sector is grappling with an “immensely difficult period” as recent data from auditing firm Mazars reveals a staggering 4,370 construction companies went bankrupt in the past year. This marks the highest number of insolvencies in any industry in the UK for the third consecutive year. The challenges faced by the sector include soaring material and labor costs, increased borrowing expenses, and a decline in consumer confidence driven by a 15-year high in mortgage rates.

The year-end figures to November 2023 show a 7% increase in insolvencies compared to the previous year and a staggering 76% rise from 2020/21. Rising costs of borrowing have impacted profit margins on development projects, and the surge in mortgage rates has led to a decline in consumer confidence, resulting in a drop in residential housing prices after years of dramatic increases.

Mazars highlights that construction contractors, operating on tight margins, are being squeezed from both ends. Ongoing and upcoming projects are particularly affected, with fixed-price contracts negotiated several years ago not reflecting the current cost challenges. The industry now witnesses an average of a dozen building companies going under every day in the UK.

The construction sector’s woes are expected to persist through 2024/25, with subcontractors facing financial problems as they struggle with late or reduced payments. Larger contractors’ insolvencies from 12 to 18 months ago are now reverberating downstream in the supply chain, causing delays for main developers.

Mark Boughey, a partner at Mazars, emphasized the prolonged impact of failures in the sector and anticipates continued difficulties throughout the next couple of years. As industry participants navigate these challenges, the importance of understanding the financial capacity of the supply chain becomes crucial for planning and resilience.

Mark Allen, CEO of Landsec, the UK’s largest property development company, acknowledged the cyclical nature of the industry and emphasized the importance of planning ahead for tough periods. While insolvencies may be deemed “normal” during such cycles, the need for a resilient and well-understood supply chain remains paramount.

The construction sector’s struggle highlights the broader economic challenges and uncertainties, calling for collaborative efforts, strategic planning, and industry-wide cooperation to weather the ongoing storm.