Inflation and rate rises put thousands of firms at risk of insolvency, accountant warns

Thousands of UK construction businesses risk insolvency because of high costs and unsustainable debt and are ‘desperately hanging on’ until the government’s energy relief package kicks in.

The number of companies at significant risk of going bust has shot up in the last quarter, according to data from accounting firm Mazars, which added 5,900 businesses to the category in the past three months.

It takes the total number of troubled construction companies to 16,755, up 54% from the 10,686 recorded in the previous quarter.

Mazars partner Rebecca Dacre attributed the growing ranks of at-risk companies to the surge in materials prices in the wake of the Russian invasion of Ukraine.

Dacre said the government’s energy bills support for businesses could not come soon enough and that “some will be trying desperately to hang on until the relief package kicks in”.

The government’s building materials and component index recorded inflation of 24.1% in the year to July, making it difficult for firms to control costs on projects.

“They are now faced with the dilemma of how they recover costs soaring away on a fixed price contract,” said Dacre.

“Poor cashflow is an endemic problem in the construction industry so it doesn’t take much to undermine the solvency of many construction companies.”

Expected interest rate hikes could cause further misery for construction firms, many of which took on more debt to get through the pandemic.

Interest rates have already risen to 2.25% and the market is predicting it will be higher than 4% by the end of the year, with the Bank of England meeting on 3 November and 15 December to vote on rates.

Dacre added: “Rising interest rates may hit new build residential property builders at the worst possible time, as consumer appetite to take on more expensive mortgages will cool.”

According to Mazars’ data, East Anglia, the South-west and South-east have seen the largest increases in construction business at risk, with 74%, 72% and 58% increases respectively.