Case study
Challenges in the property and construction sector
Director Peter Vinden comments on the property and construction sector
According to Creditsafe, 31 construction businesses went into administration in June. That’s higher than May (24) and April (12), and the highest monthly total since last November (33).
Bearing these stats in mind – how do you see the rest of the year unfolding for the construction sector in terms of insolvencies?
Is it turning into a case of ‘Groundhog Day’?
“The reality is that a number of main contractors are still recovering from their Covid hangovers. Material supplies are now flowing but the higher prices charged by suppliers and sub-contractors during and after Covid are never going back down. Contractors that entered into long term fixed price contracts have been caught stuck between the “rock” of fixed price contracts and the “hard place” of supply price inflation, caused by the aftereffects of Covid and Putin’s energy war in Europe.
These issues are slowly working their way out through the market, but it takes time to do so. I do anticipate more insolvencies in the construction sector this year and that we are in for a hard winter ahead.”
Any different behaviour from contractors (main contractors & supply chain) to protect themselves against potential insolvencies?
“Sub-contract lengths are obviously shorter than main contracts. This means that sub-contractors can and have reacted to new conditions by raising their prices. Suppliers can and have reacted even more quickly in the same way. Main contractors take longer to react and have to suffer whilst they work through their fixed price contracts.
Some main contractors have responded to their Covid hangovers by ”squeezing” supply chains in an attempt to obtain cheaper prices and extended payment terms. This policy can only cover the gaps caused by project losses so far. The practice also tends to promote more disputes and a downward spiral of poor reputation and the reluctance of key sub-contractors and suppliers to engage with these contractors, as a consequence.”
Are construction firms finding it easier, harder or just the same as before when it comes to accessing finance e.g. loans?
“The availability of funding is still an issue for contractors of all types and sizes. The withdrawal of a number of bond suppliers from the contracting sector is causing an added headache for employers and contractors alike.
The asset-based lending market is maturing in the UK. It is in this area of the funding market where contractors and sub-contractors should concentrate if they are seeking out new lines of funding. Yes, the main clearing banks will always lend to a contractor that has a strong unencumbered fixed asset register. These same banks are, however, simply not keen to rely only on contract receivables as security for those business that are not as fortunate.”
Given that political change is on the horizon (new government highly likely after 4 July), which of Labour’s promised policies, if any, has the best chance of helping hard-pressed construction businesses to stay afloat?
Assuming it is elected as our next government, the Labour Party has promised to overhaul planning rules and fund infrastructure in a bid to revive the economy without increasing the tax burden. Given the adverse comments made by the Labour Party about past PFI initiatives and its reluctance to follow this criticised model of project funding, I confess to be being confused about how they will accomplish this promised piece of magic. What am I missing?
Our next government may have a secret formula for helping hard-pressed construction businesses to stay afloat, but I haven’t read about it as yet.”
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