A record 4,287 construction companies entered insolvency in the UK in the year to May 31 2024*, says Forvis Mazars, the international audit, tax and advisory firm. 4,208 construction companies entered insolvency in the previous year.
The rise in insolvencies of construction companies comes as high interest rates and the struggling office and retail markets depress demand for new commercial real estate.
The UK construction PMI, an index that measures construction activity, was 15% lower in May 2024 than in May 2021**, showing decreased demand in the sector. Low demand from developers is rippling through the supply chain causing contractors and subcontractors to become insolvent.
High-cost inflation of building materials also continues to hit profitability in the sector – the cost of building materials is up an average of 37% from this time five years ago, according to government data.*** For an industry that has always operated on tight margins, even a small increase in costs, that can’t be passed on to customers, can cause serious economic damage.
Weak demand for office and retail space also exacerbates the problem of slow payment in the construction sector. Many smaller sub-contractors find their invoices are being paid progressively later, forcing some into insolvency.
Rebecca Dacre, Partner at Forvis Mazars, said, “17 construction companies are now going insolvent every working day. This is an extremely tough period for the industry.
“Contractors have traditionally had to operate on very thin margins, even when the economy is booming.
“When the economy struggles, it’s often construction companies that get hit the hardest. That’s what has happened over the past year.
“Borrowing costs are beginning to fall significantly but need to come down more for this sector to recover.”
Insolvencies of construction companies now make up over 17% of all insolvencies in the UK and Wales in the last twelve months, the highest of any sector.
* Source: The Insolvency Service
** Source: S&P Global
*** Source: Department for Business & Trade monthly construction material price index, May 2024 compared with May 2019
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