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There have been fresh concerns about a potential rise in construction industry insolvencies in the coming months and into 2022, primarily due to increasing material costs coupled with exponential sector demand.

Whilst the number of construction insolvencies since the start of the Covid-19 pandemic have fallen to the lowest levels in over a decade, the ending of Government support schemes, the commencements of repayments of the Government business loans and with the end of the Furlough scheme in sight, tougher times could lie ahead for the sector.

Shauna McStravick looks at some of the factors impacting the construction industry in Northern Ireland and outlines why seeking early advice is crucial in times of financial distress.

Insolvencies in the construction sector across the UK dropped dramatically from 3,228 in 2019 to 2,042 in 2020, the lowest figure for over 10 years.  The reason for these unusually low levels being the level of Government support made available from the end of March 2020.

Since April 2020, the construction industry has been one of the main beneficiaries of this support availing of tens of billions of Pounds through the furlough scheme and government-backed loans, while also deferring VAT and PAYE payments to HMRC in response to the Covid-19 pandemic.

In January 2020 the British Business Bank confirmed that the construction sector accounted for 17% of all Coronavirus Business Support Interruption Loans (CIBILS) and Bounce Back Loans, making it the largest recipient of any sector.  As such, without this support, it is likely that large numbers of construction firms would have collapsed.

So now as this support is being withdrawn, the loans and VAT deferrals are starting to be repaid as well as Furlough coming to an end in September 2021, will the true impact of the Pandemic on the sector be unmasked and are we likely to see these unusually low levels of insolvencies go in reverse?

It seems that the tide of uncertainty that the construction sector and indeed the wider UK economy has experienced from the impact of Brexit and Covid-19 appears to be finally turning, with global supply problems and resilient levels of demand driving dramatic increases in forecast tender prices.

Soaring prices are in most cases being passed onto consumers, with a third of small UK building firms saying that these increases are squeezing their margins.

According to the Federation of Master Builders (FMB) in NI, the cost of timber was recorded as having the greatest increase but there has been a marked price increase recorded in respect of most supplies which is having wide ranging impacts on businesses to include;

• 85% of builders are of the view that the price hike will drive consumers to employ rogue traders in order to try and save money on building projects
• 32% of SMEs have had their margins squeezed
• 22% have been forced to pass material price increases on to their clients
• More than one in ten builders report making losses on their building projects due to the material price increases.

As such, the increase in prices is impacting on what may already be thin profit margins.  Some businesses are already reporting losses on projects where fixed price contracts have been procured without a fluctuation clause built in. This on top of increased wages stemming from long term construction skills shortages is placing pressure on some businesses and thus the potential for rising insolvencies.

However financial distress does not necessarily lead to insolvency. In order to mitigate any risk, businesses need to be prepared, control their costs and manage their risks. When negotiating contracts, it will be vital to consider the impact of material unavailability and increased costs at the outset. It may also be advisable for businesses to try and limit their exposure by widening their supplier base or enter into long-term pricing agreements with suppliers.

It is important for owners to continually review their financial position with management information and scenario planning being key when planning for uncertainty. By fully understanding their business, proactively planning and adapting and seeking advice quickly, business owners have more options should they enter financial difficulty.

CavanaghKelly’s highly experienced team can quickly get to the bottom of the issues, identify and test possible solutions before considering a formal insolvency approach. Our close working relationships with financial institutions across the region allows quick access to key decision makers to identify where a work-out is possible.

Get in touch with Michael Drumm or Shauna McStravick for a confidential discussion.