Britain’s construction sector is heading for a cashflow crisis, with firms battling late payments and rising costs on contracts that are now being delivered at a loss, according to new research from UK accountancy and advisory firm Menzies.
The firm’s latest report, Fixing the Foundations, based on a Censuswide survey of 250 senior finance decision-makers in construction and property firms in the UK, finds:
· 86% of construction and property firms are already in or at risk of serious financial distress, with the average firm expecting to reach that point within eight months;
· 93% report late payments from clients, contractors or supply chain partners, running an average of 53 days overdue;
· One in five (20%) firms are now financing their own projects while they wait to be paid.
Construction has topped the UK insolvency tables for several years, but Menzies’ research reveals that eight in ten (86%) firms are already in or at risk of serious financial distress, with the average firm expecting to reach that point within eight months. This crisis extends well beyond the firms that have already gone under.
Late payments are now almost universal across the sector, with nine in ten (93%) firms reporting delays from clients, contractors or supply chain partners running an average of 53 days overdue. The knock-on effect goes beyond cashflow. One in five (20%) firms are now financing their own projects while they wait to be paid, effectively bankrolling clients out of their own working capital, and 18% say late payments represent one of the single biggest threats to their business.
The cost environment has worsened the picture further. Nearly a quarter (23%) of firms say rising material and labour costs are putting unsustainable pressure on project margins. For those that signed contracts before inflation hit, the damage is already done: one in five (20%) say those contracts are now far less profitable than expected, and a further 18% say some have been delayed to the point of no longer being profitable at all. Nearly all firms (98%) cite fixed-price agreements signed before the inflation surge as a key driver of financial pressure. The uncertainty caused by changes in US tariffs are adding a new layer of pressure, with 19% saying they are making sourcing materials and labour more difficult and costly, and 17% saying the same of Brexit. At the same time, 15% say that investing in technologies such as AI to remain competitive is itself creating financial strain.
The research also points to concerns about long-term resilience. More than one in ten (14%) firms admit they are not confident their business is future proofed against supply chain shocks, and 18% say they are not protected against disruptions caused by war and geopolitical instability. A further 18% say a single insolvency or change in the supply chain could trigger financial problems for their business.
When asked what would most improve sector stability, a quarter (25%) of firms pointed to Government action to stabilise material and energy costs, while nearly as many (24%) called for the establishment of a single construction regulator to replace what they describe as a fragmented system. Nearly a quarter (23%) want mandatory maximum payment terms for construction contracts, while one in five (20%) want greater supply chain transparency and protections and greater flexibility to renegotiate fixed-price contracts affected by inflation, and 18% want stronger enforcement of prompt payment rules.
Freddy Khalastchi, Partner at Menzies LLP, said: “Too many construction businesses are still trading, still winning work, but heading in the wrong direction without realising it. A full order book can mask a lot of problems, and in construction the gap between looking busy and being profitable can widen faster than most owners appreciate.
“Most firms usually come to us for advice because something has forced their hand, but by that point, the routes available for recovery are far narrower than they would have been six months earlier. The firms that manage to work through their financial issues are not always the biggest or most resourced. They are the ones that recognised the warning signs earliest. Our advice is simple: take expert advice at the first sign of pressure and make sure that in doing so, you have all the financial information relating to your business at your fingertips. You cannot dictate when a client pays or how geopolitics disrupts your supply chain. But you can control how prepared you are for when they do.”
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