Rise in late and failed payment claims suggest situation could get worse
Increasing numbers of construction companies are going bust as a result of high inflation and interest rates – and the most recent statistics for late payment claims suggest it could get worse.
According to the Insolvency Service, 471 construction firms went under in May, a 34% increase year-on-year and the highest number in recent years.
Colin Hardman, restructuring and recovery partner at Evelyn Partners said businesses were having a “really tough time” as higher interest rates adversely affect profits and access to new funds.
“As wage rises typically lag inflation, we can expect the business environment to continue to be extremely challenging,” he said, urging companies to prepare a rolling 13-week rolling cash flow forecast to ensure that they are aware of their cash burn and give themselves time to implement a recovery plan if necessary.
Elevated insolvency rates show little sign of abating, with data collected by insurance firm Atradius revealing a 41% increase in late and failed payment claims in Q2 compared with Q1, and a 178% increase year-on-year.
James Burgess, Atradius’ head of commercial, said these figures were “a clear sign that pressure is continuing to rise, as inflation, rising interest rates, rising costs and cautious lenders put businesses on a collision course with insolvency”.
He added: “As the average fixed mortgage rate rises to 6.64% this week, compared with 2.87% this time last year, construction businesses are likely to feel the pinch as buyers continue to spend cautiously, with house building, renovation and extension projects all expected to be impacted.
“Consumer caution will inevitably impact house builds, and we may see a decrease in the number of new builds as the sector (and buyers) adjust, with the average price of property falling by 2.6%* in the past year – the fastest annual fall since 2011.
“Over the coming months, construction firms need to ensure they maintain focus on control of costs and liquidity, safeguarding borrowing agreements, and prioritising robust financial forecasting to give themselves the best chance of survival.”
According to the Building Cost Information Service, labour costs are set to become the number one challenge for firms fighting to stay afloat.
The organisation is forecasting a 10% uptick in labour prices as the cost-of-living crisis puts upward pressure on wage inflation.
Ongoing shortages across the industry are compounding the problem, with 69% of civil engineering firms struggling to find skilled operatives for projects including HS2, the BCIS reported.
Yesterday, the government announced that a number of building trades would be added to the Shortage Occupation List, making it easier for companies to recruit foreign workers to plug gaps.
David Crosthwaite, chief economist at BCIS, reported that annual growth in the BCIS labour cost index is predicted to increase to 5% in the third quarter of this year, rising to 8.3% in the second quarter of 2024.
He said: “While the cost of materials is now stabilising, labour is set to become the next biggest cost driver for construction going forward.
“Labour site rates continue to rise faster than wage awards. We’re expecting a period of catch-up, with people demanding wage increases that go towards offsetting some of the price rises we’ve seen across the rest of the economy.
“It’s also important to remember that while material cost increases are slowing, levels are still significantly higher than they were three or four years ago.”