Mitigating supply chain insolvency risk


Careful contract negotiation can limit the potential damage from insolvency in a construction firm’s supply chain

The construction industry suffered the highest number of company insolvencies in the first half of 2022, with 2,083 firms entering an insolvency process. This represents a failure rate of just under 1% of total construction companies in the first half of 2022 alone, and 20% of total insolvencies in the same period. According to a recent ONS Business Insights and Conditions Survey, the primary concern for building firms this year was accelerated inflation of goods and services, as the industry relies heavily on raw materials such as cement, brick and steel, the costs of which are influenced by energy prices.

Interest rates are at their highest since 2008, pushing up mortgage costs and putting pressure on the housing market and the value of work in progress and investments made by construction businesses. In addition, many construction companies will be experiencing supply chain breakdown due to increasing costs. Given the pressure-cooker environment in which businesses are now operating, and the ongoing political uncertainties, it seems inevitable that many projects will suffer delays, postponement or cancellations, leading to a rise in contractual disputes.

So, why do disputes arise in times of financial difficulty, and how can construction companies best protect themselves from the effects of insolvency in their supply chain?

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