December 6, 2021

Is a spike in insolvencies on the cards for construction?

Insolvencies in the construction sector could rise as much as 25% in the next six months despite a rebound in orders, warns a new industry report.

In its new Industry Trends: Construction report, Atradius details how the UK construction sector is benefiting from a robust demand-driven rebound that will see growth return after the negative impact of the pandemic. Despite the sector contracting by 14% in 2020, UK construction output is forecast to rebound by almost 15% in 2021 and grow by more than 5% in 2022. While commercial construction activity is hampered by subdued demand for retail and office space, growth is being predominantly driven by residential building and large public infrastructure projects. However, Atradius also reports that a shortage of construction materials has led to delays in project completion.

With business intelligence on millions of firms worldwide, Atradius reveals payments in the construction industry currently take an average of 90 days. The number of non-payments and insolvencies over the past 12 months has been low. However, both are expected to increase in coming months as government support ceases, while higher material prices and labour costs eat into the financial strength of businesses. Atradius report margins are already tight and any slippage could have a major effect on profitability and performance.

Atradius experts warns that both material and labour shortages have triggered significant cost increases and this knock-on effect will ultimately squeeze profit margins in the short and medium term, particularly for builders with fixed price contracts. Should input prices continue to remain overly high, Atradius forecasts insolvencies could increase up to 25% in the coming six months. Due to the looming downside risks for industry, Atradius’ sector outlook remains ‘poor’ despite the robust rebound in orders and output.

Mike Thomas, Director of Risk Services at Atradius, said: “With rising orders and output, there are new opportunities building in the construction industry which will continue to drive growth. These include pent-up demand for construction works that were put on hold during the pandemic along with benefits from stimulus measures, an increasing focus on sustainability and growing urbanisation in emerging markets. However, despite the market rebound, competition is intense, profit margins are narrow, late payments are rising and there is a higher proportion of business failures than in most other industries. With insolvencies forecast to increase further, businesses in the sector must be prepared to weather the storm by sourcing comprehensive real-time data on their buyers, a proactive credit management strategy and protection against non-payment.”