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Financial recovery under threat

The number of construction companies with financial problems fell by a quarter in the three months to June, according to research - but the trend could be short-lived.

Insolvency specialist Begbies Traynor found that 17,033 construction firms experienced financial difficulties in the second quarter of 2010.

This was down 26 per cent from 22,990 in the first quarter of the year, and down 17 per cent from 20,566 in the second quarter of 2009.

But the number of construction firms experiencing financial distress remains at historically high levels, 24 per cent higher than in the second quarter of 2008.

This is a far greater rise than the all-industry increase of 15 per cent over the past two years, showing the extent to which construction firms suffered during the recession.

The worst may be yet to come, as the report suggests the recent improvement in company finances could be under threat from more than £100 billion in spending cuts expected from the coalition government.

These cuts will hit virtually every sector and threaten those firms most dependent on public sector work.

Begbies Traynor partner Nick Hood said: “There is a growing risk that even if the UK avoids a double-dip recession it could develop a twin track economy, with public sector-dependent industries such as construction facing higher levels of financial distress than sectors less directly linked to government spending cuts.”

The largest regional drop in financial difficulties during the past three months came in Scotland, where there was a 30 per cent reduction to 1,034 firms.

This could be in part due to the country suffering more than most regions during the recession and therefore having the most scope to recover.

The South-west saw a similar turnaround during the same period, with 28 per cent fewer firms classed as in trouble, taking the number to 2,941.

The smallest improvement was in the East Midlands, which still saw a 22 per cent reduction in the number of firms in trouble.

Just last month, East Midlands-based contractor Baggaley and Jenkins went into administration with the loss of about 30 jobs.

Several other firms went into administration around the UK in June, including Banner Holdings, Highland Quality Construction, Laishley and Pilkington Tiles.

The most high-profile firm to disappear during the recession has been Jarvis - once the UK’s biggest construction company.

The full impact of the Jarvis ­liquidation is still being calculated, but more than 1,000 people have lost their jobs and the firm owes £33.7 million to trade creditors, which are unlikely to receive a penny.

Indicators point to further trouble for construction. In the past week, a Savills report highlighted the death of the commercial construction revival and a survey from the Royal Institution of Chartered Surveyors said house prices were likely to fall.