Eighty-five per cent of contractors have seen a supplier go bust on more than one of their jobs in the last 12 months, according to research by Construction News.
The news comes as concerns mount over capacity across the UK, with work in London in particular coming under pressure.
A report by consultant Arcadis this month warned that the construction market in the capital is facing a significant imbalance, with workloads increasing and the pricing of contracts remaining difficult.
This is likely to have a knock-on effect on new and ongoing developments, according to Arcadis, which also ranked London as the most expensive place to build in Europe.
The report revealed that insolvencies were on the rise, while cashflow failures, problem contracts and lack of control of supply chains have become pressing issues for large numbers of tier one firms.
Responding to the findings from CN’s quarterly Barometer survey of leading industry figures, one managing director at a tier one contractor said he had seen “plenty of insolvencies” in recent months.
“Companies just hunkered down in the recession and drove their business by keeping work going through their books; then when the prices start going up they got caught on the upside on commitments to contracts where costs are rising,” he added.
Asked what they were doing to mitigate risks ahead of projects starting and then during the construction phase, the managing director said that aside from “keeping an eye on cashflow”, he was also looking out for trading positions and company behaviours.
“It’s a difficult time for main contractors and you want to support your supply chain right the way through these tough times, because the impact on you [financially] will be significant if they go under, rather than if you if you can keep people trading right the way through,” he said.
Views on 2016
Asked for their thoughts on 2016, here are some of the CN Barometer responses (all answers are anonymous):
”Bid selectivity will be key for contractors and smarter clients will realise the need to ensure their projects are real and certain and that their procurement processes/criteria are attractive.”
“Despite the optimism, schemes are still suffering from unrealistic bugets and expectations that don’t reflect reality and issues with supply chain capacity and capablity.”
”Contractors need to be allowed to make a decent return; risk/reward is out of sync - the perception by clients is that contractors make lots of money and rip them off. Things must change.”
”We need goverment to come off the fence on major infrastructure investment and we need organisations like [Highways England] to stop playing with procurement models.”
”Supply chain cash flow,and subcontractor default, leading to project disruption and delays. Consultants moving into the construction sector and not being able to match the balance sheet strength of main contractors, but because of their relationships convincing clients that they can deliver. Some likely high profile failures will occur in 2018.”
Willmott Dixon managing director Anthony Dillon agreed, but said this did not always happen. “[Some] contractors lean on the supply chain to give themselves a bit of additional breathing space, but that just gives the supply chain further pressure and further woes,” he said.
One executive-level director at another contractor said that losing suppliers to insolvencies or administration was a continuing risk, with the prospect of specialist firms going under likely to hit particularly hard.
“If it was a cladder [that went into administration] that would be a nightmare because of the specialist nature of what they do,” he added. Mr Dillon also pointed to specialist firms as posing the biggest risk to projects, with mechanical and electrical contractors cited as being particularly critical.
The tier one MD said clients could also do more to ease supply chain pressure. “I still think that some clients are pretty hardnosed and haven’t changed their views on the speed at which the industry outlook has changed.”
He argued that clients are estimating pricing based on past performance, rather than looking at future cost pressures.
He explained: “Clients are getting advice from people who are looking at the last job they did on that basis, so [pricing] tends to be a bit backward looking.”
He said this had led to some clients, in extreme cases, having to back out of projects even after the scheme had received planning permission because the construction costs have turned out to be well over budget.
Other findings from the latest Barometer survey showed that the top three challenges facing contractors today were skills shortages, client demands and “suicide bidding” (see box).
The results also showed that 88 per cent of contractors expect problem contracts to have cost their business up to £25m in 2015.
Construction News Barometer results
The skills shortage is the main challenge facing firms according to 81 per cent of respondents, with client demands (50 per cent) and suicide bidding (46 per cent) also featuring prominently.
- Sixty-four per cent of contractors think Aecom’s move into contracting is ‘unlikely to work’.
Aecom move into contracting_CN Barometer Q4 15
- Only one respondent was offered cash incentives for unsuccessful bids by a client on more than one occasion over the last 12 months
- Contractors were split 50:50 as to whether the Autumn Statement and Spending Review boosted their confidence to invest in their firms.
- Four in five (81 per cent) felt the Conservatives were the political party that best understood the construction industry
Best political party_CN Barometer Q4 15
- Seven out of 10 firms backed Conservative candidate Zac Goldsmith as London’s next mayor.
- After Tideway CEO Andy Mitchell sought 50:50 male female shortlists from recruiters for new roles, just 15 per cent of people backed clients using quotas to improve diversity.
Results from the Construction News Barometer for Q4 2014 had revealed that 45 per cent of respondents thought their company employed enough women, and 53 per cent said they employed a sufficient number of people from ethnically diverse backgrounds.
Diversity quotas_CN Barometer Q4 15
- Just a quarter of respondents (27 per cent) said they were satisfied the CITB meets industry needs on apprenticeships and training
CITB satisfaction_CN Barometer Q4 15
The Construction News Barometer is sent to senior management at the top 100 UK contractors. It is anonymous. The survey was open from 16 December to 7 January and completed by 26 respondents.