The construction industry accounted for 16% of administrations in the first six months of the year – the highest sector in the UK – according to analysis by full-service law firm Shakespeare Martineau.
More than 620 businesses, 98 of which came from the construction industry, filed for administration between 1 January and 30 June 2022, marking a 60% increase compared to 2021.
Kate Onions, partner and head of construction disputes at Shakespeare Martineau, said: “It is no surprise that construction is the worst-hit sector in the UK for administrations. Not only is there a skills gulf as a result of the immigration decisions of the current government, but there is also wage and material cost inflation and increasing interest rates, backed up by a broken procurement model.
“All employers want fixed-price contracts in order to gain certainty, but in a market plagued by inflation, it leaves contractors with wafer-thin profit margins, which filters down the supply chain.
“We have seen companies go under due to winning tenders they haven’t fully thought through as they cannot deliver for the price they initially bid for. As a result, we are beginning to see a hardening of the market in the sense that savvy commercial contractors are now less willing to put in fixed-price tenders such that they have at least some degree of buffer from these nightmare scenarios.
“With a recession seemingly on the horizon and potential disputes caused by Covid delays, sadly, I think we’ll see a continued increase in the number of insolvent companies in the construction industry.”
While administrations nationally are still yet to hit pre-Covid levels (940 in the first six months of 2019), recession fears and the financial pressure on households and businesses means the worst is still yet to come, an insolvency and restructuring expert has warned.
Andy Taylor, partner and head of restructuring at Shakespeare Martineau, said: “Administrations were suppressed during Covid due to the introduction of numerous measures, such as the Coronavirus Business Interruption Loan Scheme, the subsequent Recovery Loan Scheme and a general prohibition on many forms of enforcement.
“As those support packages have been removed, we have seen an increase in insolvencies generally, which is to be expected.
“Businesses are facing numerous headwinds – from inflation and interest rises to the challenging political landscape at home and further afield. There are a lot of businesses with endemic problems they have been sitting on for months and, in some cases, years. If things continue as they are, we expect to see an increase in business failures as they attempt to address their underlying issues and battle tough trading conditions.
“We’re also anticipating the banks will review their portfolios and it may be they will be taking a more cautious approach to lending decisions in the short to medium term. We are also seeing more enforcement and less flexibility from HMRC.
“There is no doubt a rocky road ahead – with some commentators predicting a demand-led recession, which looks very different to what we experienced coming out of Covid.”
Skills shortages, supply chain issues and ever-rising costs of materials and energy are plaguing the construction and manufacturing sectors, while inflation and competition from online retailers are affecting the retail sector.
Andy said: “There is a lot of pressure on the construction industry generally and we are also seeing problems on the high street in terms of consumer spending, which is not going to improve with inflation running to 9% at present.
“According to our analysis, the utilities sector only accounted for 3% of administrations in the first half of 2022. However, we do know there has been numerous energy company failures in the past 18 months due to huge problems in the market, and we expect to see further consolidation in the energy sector over the coming months.”
While January (55) was the quietest month, administration numbers leapt to 140 in March – the most recorded for 15 months – before dipping to 120, 93 and 104 in April, May and June respectively.
Andy said: “I suspect the spike in March highlights a degree of lag as businesses began looking at their trading and profitability as we emerged from the pandemic and the Covid measures started to end.
“It is interesting that the number of businesses filing for administrations after March started to drop off again. This is counter-intuitive because there is still extreme uncertainty and economic pressure. June figures have started to increase again and initial indications are that July will follow a similar pattern.
“There are many businesses in a state of flux and for them to survive longer term, they will need to act now to address underlying issues. Taking a proactive approach can help directors to keep their business afloat. I cannot overstate how important it is to get to grips with matters at the earliest possible juncture and to take the appropriate professional advice if required.”
