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26% of construction companies at risk of going bust

Lee Causer

Our research shows, 26% of construction companies currently exhibit warning signs that indicate they are at risk of failure*.

Companies building commercial properties are most at risk, with 32% facing an increased chance of entering into insolvency by 2020. This compares to 23% for those building residential properties.

This reflects how the commercial property sector is facing increasing pressure from continued uncertainty over Brexit negotiations, throwing their ability to secure buyers or tenants for new buildings into doubt.

Many multinational companies are weighing up whether to maintain UK staff levels and retain offices here, and investors are reviewing the on-going attractiveness of markets such as London.

Residential property building companies are at slightly lower risk because the housing shortage is likely to sustain demand for new homes. The Government has set a target to build one million new homes by 2020.

The construction sector is under pressure due to tightening margins as the fall in Sterling since the EU referendum has pushed up import costs, with smaller contractors’ profitability among the hardest hit.

Smaller companies can also find it harder to access bank lending for projects, putting cash flow under strain.

Construction companies could face further problems in the future if access to skilled labour becomes more limited following Brexit, pushing up wage bills, if EU nationals are no longer willing or able to work in the UK.

Lee Causer, Restructuring Partner, comments, “Brexit is weighing heavily on the construction industry, putting the viability of some firms at risk.

“Uncertainty over future demand from potential purchasers and occupiers, particularly in the London office market, combined with rising materials costs and the increasing problem of skills shortages, could create a perfect storm.

“Construction companies need to ensure that their business models are resilient enough to withstand whatever the next few years has in store and put contingency plans in place to cover all eventualities.”

While most specialist sub-contractors’ risk of failure is in line with the sector average of 26%, plumbers and heating/air conditioning engineers, as well as electricians, are at lower risk, at 23% and 22% respectively.

Lee Causer adds, “Specialist trades such as plumbers and electricians continue to be in strong demand, as the trend for home improvements shows no signs of slowing and the pace of new house-builds looks set to continue as the Government tries to plug the housing shortage.”

* Analysis from Moore’ ‘Moore Data’ service of construction companies registered as limited companies as per Companies House- Year end June 13th 2017.