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Rising insolvencies: Time to ring alarm bells?

Charlie Schouten

Is a rise in company liquidations a symptom of an industry in declining health?

Morgan Tucker. Harbur Construction. Land Engineering. Weiser Construction.

These are just some of the businesses that have been forced to call in administrators over the past six months.

Just yesterday, administrators were called in at Blackpool-based contractor Eclipse Developments.

The reasons behind these collapses vary – from a payment dispute with Galliford Try, in the case of Scottish contractor Power One; to a botched demolition job, as with Liverpool demolition firm J Bryan (Victoria). Some have left creditors out of pocket, while others, like Selwyn Building Services, have been rescued from administration by a management buyout.

Whatever the reason behind these administrations and collapses, it’s never a good sign to see companies put under financial pressure or jobs lost. 

That’s why statistics from the Insolvency Service should cause those in the industry to sit up and take notice. The government body reported that there were 730 new company insolvencies in construction during the first quarter of the year – the highest number reported in the industry since Q1 2014.

Insolvencies were up 8.8 per cent quarter on quarter and by 8.6 per cent year on year. It’s a far cry from Q4 2015, when the number of insolvencies fell to 562 – the lowest level for at least seven years.

After a decade of relatively low levels of insolvencies – there were typically between 300 and 450 in construction each quarter between 1997 and 2007 – this latest rise is a warning sign.

Yes, insolvencies are still some way off the recessionary peak of 1,098, recorded in Q1 2010, but the gradual rise seen over the past 12 months is worrying.

It begs the obvious question: why now?

Our CN100 this year showed that the industry’s larger contractors were making little progress on margin, with the top 10 firms actually losing money when their pre-tax profit figures were combined.

Their woes are a microcosm of what can happen to contractors that don’t bid for work carefully – and the last recession proved that there’s basically no such thing as ‘too big to fail’. Most will recall the demise of the £231m-turnover Longcross Group in 2015, and the collapse of £200m-turnover GB Building Solutions that same year.

One economist I spoke to chalks up the rise in administrations and liquidations to cost increases, with firms either unprepared or unable to deal with spiralling materials and labour costs on contracts, particularly those won several years ago.

And the recent slowdown in work, although relatively small, is still likely to have an impact on contractors, many of whom have ridden a wave of rising workloads in the past three years.

But ultimately, as the economist adds, there’s simply no way to stamp this out completely; in an industry that has struggled to push its margin up past 3 per cent, financial risk and walking a fine line is a part of life.

Whether contractors can continue to manage that as the industry changes remains to be seen.

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