Suzanne Brooker turns her attention to the Construction sector to outline the current challenges and some tips

Overview

This is the first in a series of articles focussed on the competitive and challenging Construction sector.

In 2021 2,579 construction sector firms became insolvent. In February 2023, 30 construction sector firms went into administration – amongst them some large contractors. The loss of large contractors creates fear at sub-contractor level. The debts left by contractors has an inevitable adverse impact on sub-contractors.

Headwinds

The sector continues to suffer from economic headwinds particularly:

• Supply chain, inflation and the increase cost of materials
• Labour
• Energy and fuel costs
• Market contraction

Whilst supply chain infrastructure has begun to stabilise over the last quarter, material pricing is set to remain high. Whilst the cost of timber has reduced considerably in recent months the cost of bricks and plaster is set to continue to increase this year as a result of higher production costs.

Inflation and the corresponding rise in interest rates increases the cost of borrowing as well as the cost of purchasing materials and labour. The debt incurred during the pandemic remains in balance sheets often hindering new capital borrowing.

Labour shortages in the sector have been the subject of significant press coverage. The relaxation of UK Visa rules announced earlier this month for roofers, plumbers, bricklayers, carpenters, and plasterers is good news for the sector. The Migration Advisory Committee have added these trades to the UK’s shortage occupation list to make it easier for migrant workers to apply for work visas to fill vacancies. However, the process and costs to sponsor a skilled worker may continue to challenge the SME sector and the delay in obtaining such UK visas may mean that the shortages are not overcome in the short term.

The Energy Bill Relief Scheme which provides a discount on wholesale gas and electricity prices for all non-domestic consumers ends on 31 March 2023. From 01 April 2023 a new Energy Bills Discount Scheme will apply and will run for a further 12 months. Eligible non-domestic consumers will receive a per unit discount to wholesale gas and electricity prices above a threshold, subject to a maximum. The new scheme will offer some relief to the sector (particularly those involved in the production of materials for the sector) but currently construction is not identified as a sector eligible as an “intensive industry” to benefit from the higher discounts under the scheme.

It is estimated that there will be a 1.9% contraction in UK construction this year. There are weaker pipelines with longer lead times and extended tender processes. Inflation and corresponding price increases have resulted in tighter margins. Many contractors tied to fixed-price contracts have found profits fatally eroded jeopardising the completion of projects.

Key actions

Those operating in the sector should look at the impact of these challenges on cashflow. Keeping up to date financial management information and cashflow is essential.

Good contract management is key in all parts of the construction chain. Whether you are an employer, a contractor or a sub-contractor you should carefully review your contracts and contingency plan for non-performance issues and the possibility of insolvency of other parties in the project.

The process for payments under contracts should be reviewed. There is an increase in adjudications for withholding payment and for “smash and grab” applications for payment. Keep an careful eye out for:

• Inflated applications for payment
• Increases in withholding payment
• Evidence of non-payment of sub-contractors

If you are experiencing signs of financial distress then take early advice to increase the prospects of avoiding a formal insolvency. Early intervention and communication can often result in a collaborative outcome for all – the projects reach completion and the parties get paid. The earlier financial issues are addressed means the greater the prospect of the company avoiding insolvency. Access to and the success of refinancing or debt restructuring, operational and legal restructuring or accelerated sales options advice and contingency planning rely on both time and cashflow.

Need help? Please contact:

[email protected] or [email protected] – Restructuring & Insolvency partners