Construction sector feeling the pinch as rise in insolvencies is predicted

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The recent squeeze caused by a combination of increasing costs, the lifting of the final restrictions imposed during the pandemic on commercial debt recovery and the requirement to begin repaying COVID support loans has resulted in a sharp rise in the number of businesses potentially facing insolvency compared with last year’s figures.

Supply chain issues, the impact of Brexit and challenges in relation to recruitment are also contributing to the gloomy outlook.

The number of County Court Judgements (CCJs) being brought by creditors against defaulting businesses has tripled since this time last year, a clear indication of the financial hardship that many are facing. And now commercial landlords can also begin to make claims for unpaid rent once again.

In response, there have been calls for more support to help alleviate the pressure on ailing companies, such as through the extension of loan repayment schedules but it’s unclear whether any further government invention will be forthcoming.

The construction sector is among those hit hardest by the current situation.

What are the particular financial issues faced by businesses in the construction sector?

In the highly competitive construction sector, it is common for contractors to:

  • carry the risk of cost inflation; and
  • accept significant financial consequences for completing late.

A contractor is, therefore, exposed to the risk of:

  • rising input costs; and
  • delays in supply of materials.

It was reported that at the beginning of 2022, a contractor was paying on average 20% more for its materials when compared with the same time in 2021. This increase being partly fuelled by shortages of materials caused by a malfunctioning supply chain and too many contractors chasing too few materials.

The lowest bid commonly secures the project. The most prudent contractor is, therefore, often forced to accept the risk of rising costs and late completion.

Given the volatility of the market, a contractor should carefully consider the allocation of risk between it and its employer, to safeguard both the contractor’s future and the completion of the project.

What are the warning signs of financial difficulty?

It is important to keep an eye out for signs of financial difficulty, whether you are a contractor or an employer.

A contractor should be wary of:

  • A slow-down in the speed in which payments are made.
  • Promises of payment which are not met.
  • Partial payments being made rather than full payment.
  • Inability to be able to speak to the relevant people when chasing payment.

While an employer should look out for:

  • Works slowing down.
  • Fewer operatives/sub-contractors on site.
  • Materials deliveries not being made.

What are the legal options available to construction companies facing financial difficulty?

From a creditor perspective, keeping on top of debts and chasing for payment quickly is advisable.  In addition, there are a number of options in relation to enforcement of contracts and payment of debts.  From a debtor perspective, seeking advice early in order to take advantage of the various options for resolution and turnaround is essential. The earlier that advice is obtained, the more options there are available.

How can Buckles assist?

Our dedicated Construction and Restructuring, Turnaround & Insolvency Teams can advise on all matters arising out of the above, and can provide invaluable support and guidance through what can be very difficult and trying times.