According to the Building Cost Information Service (BCIS), the UK experienced 4,205 construction administrations in the first nine months of 2023. This marks a 9.2% increase from the 3,849 insolvencies recorded in the year up to July 2022 and a 30.7% increase from the 3,218 insolvencies recorded in 2019. (BCIS, 2023). The number of construction insolvencies is anticipated to increase even more in the upcoming months. (Red Flag Alert,2023).
What’s behind the spike in insolvencies in the construction sector?
The construction sector faces a perfect storm of challenges, including rising costs, payment delays, a shortage of skilled workers, Brexit, reduced government funding, and climate change. As a result, contractors are finding it increasingly difficult to maintain profitable businesses and avoid insolvency.
The two biggest challenges are the shortage of skilled workers and the rising materials and labour costs. These are both due in part to Brexit and the COVID-19 pandemic. The war in Ukraine has also exacerbated the problem by disrupting supply chains and driving up energy prices.
Contractors locked into fixed-price contracts for extended periods are particularly vulnerable, as they have to absorb the rising costs, which can lead to cash flow problems and, in some cases, insolvency.
How can you safeguard your project in light of this rising trend?
When hiring a contractor, it’s essential to perform proper due diligence to evaluate their financial stability. This is crucial for a few reasons:
- If a contractor were to go into administration, finding a replacement contractor to finish your project could be difficult and expensive.
- It could harm your reputation and make it harder to work with other contractors and suppliers in the future.
- It could disrupt your supply chain, causing delays in your project and hurting your cash flow.
Discover how MacConvilles safeguards your projects:
At MacConvilles, we prioritise the financial stability of the contractors we recommend for your tender process and employ a comprehensive approach to ensure your project remains secure:
- Examine Company Accounts: We recommend your accountant scrutinise the contractor’s company accounts, particularly their latest management accounts, to provide an insight into their financial health.
- Utilise Credit Check Services: We recommend clients carry out a credit check to measure the contractor’s financial stability.
- Interrogate Contractor’s Approach Risk to Management: We will work with the proposed contractor to ensure the project is appropriately resourced and supervised to mitigate potential risks, particularly financial risks.
- Establish Written Contracts: We will ensure suitable contract terms are agreed upon between the client and the contractor to mitigate risk and ensure cost program and quality are decided upon before works commence.
In addition to these fundamental steps, we recommend considering the following strategies:
- Pre-Qualification Questionnaire (PQQ): Implement a pre-qualification questionnaire (PQQ) to assess contractors’ financial stability, experience, and expertise before inviting them to tender. This preliminary evaluation adds an extra layer of security.
- Performance Bonds: To ensure your interests are protected, requesting a performance bond from the contractor is highly recommended. This bond acts as insurance if the contractor cannot complete the project or fulfil their contractual obligations. Although there is an associated cost for the client, it provides greater security and peace of mind. If the contractor is part of a larger organisation, we strongly advise requesting a Parent Company Guarantee for additional assurance.
- Collateral Warranties: We recommend key subcontractors sign suitable collateral warranties with step-in rights. Subcontractors are then obliged to complete the works should the main contractor become insolvent. This minimises disruption, particularly with complex specialist installations.
- Implement Staged or Interim Payment Schedules: To reduce the risk of a contractor going into administration while ensuring that the employer pays only for the completed works, we recommended considering the advantages of a stage payment or interim payment schedule, which may help to maintain the contractor’s cashflow during the works.
Following these tips can minimise the risk of working with an unstable contractor. However, it is essential to note that there is no guarantee that any contractor will not become insolvent. At MacConvilles, we understand the complexities and uncertainties of the construction industry. Our professional Quantity Surveying services offer a steadfast shield against unforeseen financial risks. Whether you’re considering a new project or have concerns about an existing contractor, we invite you to connect with us today and let us be your trusted partner in navigating the intricacies of construction and development. Secure your projects with MacConvilles – where excellence meets assurance.
BCIS. (2023). Latest construction firm insolvency figures. [Online]. BCIS. Last Updated: 13/10/2023. Available at: https://bcis.co.uk/news/construction-insolvencies-latest-news/ [Accessed 20 October 2023].
Rory Traynor. (2023). 500 High Turnover Construction Companies Showing Signs of Financial Distress. [Online]. Red Flag Alert. Last Updated: October 5. Available at: https://www.redflagalert.com/articles/risk/500-high-turnover-construction-companies-showing-signs-of [Accessed 20 October 2023].
