Sharp rise in construction firms in financial trouble, report reveals

The number of construction companies in “critical financial distress” has soared by almost a quarter in a year, figures show.

A report by business recovery specialists Begbies Traynor revealed a 24 per cent hike in the volume of building firms with county court judgements declaring that they owe more than £5,000.

There were 561 construction companies in this position in the third quarter of 2022 – up from 453 during the same period in the prior year – according to the Red Flag study. A further 79,207 construction-related firms were in “significant distress” in the three months to 30 September 2022, up 9 per cent from the equivalent quarter a year earlier.

The building sector had more firms in critical distress than any other sector of the UK economy in the latest period, the report said. Construction companies represented more than one in eight of all those in significant distress.

Applied Value consultant Stephen Rawlinson said it was “no surprise” to see the sharp rise in construction companies in difficulty after being forced to endure material price inflation and labour shortages.

“The smaller operators are being squeezed,” he said. “Larger companies have pushed pain down to their subcontractors, who don’t always have the right contracts in place.”

In addition to coping with steadily rising costs, often on fixed-price contracts, subcontractors were competing for labour and seeing work dry up amid the cost-of-living crisis, Rawlinson added.

Across the economy, the number of companies rated as being in critical financial distress jumped by 25 per cent from a year earlier.

Begbies Traynor partner Julie Palmer described a “dangerous mix of rapidly rising inflation, escalating interest rates and crumbling consumer confidence”.

“Businesses that borrowed to survive for years are stuck with levels of debt that they may be unable repay – especially with interest rates expected to rise to circa 6 per cent in 2023,” she said.

“After several years of volatility, the directors of businesses up and down the country are now facing very difficult decisions. They must decide whether to soldier on or give in, as they realise their businesses may not be viable if interest rates continue to rise as many economists expect.”

An increased number of construction-related businesses collapsed in September, Construction News revealed earlier this month.

Financial experts have also warned that administrations look likely to rise further during the winter, which is traditionally a slower period of construction activity.

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