Increase in construction insolvencies to continue in 2024

There have been some high-profile administrations throughout the year across the construction sector, with administrators appointed to the housebuilder and developer Inland Homes in October. That same month saw contractor Buckingham collapse with the supply chain owed more than £108 million. In November, the groundworks and civil engineering contractor NRI Civils entered administration, and the Squibb Group entered administration after 75 years of trading.

These appointments reflect the challenging market conditions endured by construction businesses. The number of insolvencies across the UK economy has been steadily increasing over the last 12 months, with construction one of the sectors where administrations have jumped this year – of the 955 administrations across all sectors over the first nine months of the year, 127 came from construction.

There are a number of issues which have contributed to the distress in the construction sector. High interest rates and low consumer demand for new homes continues to pull at the sector. Civil engineering workloads have dropped at their sharpest rate since the summer of 2022, while non-housing building work has also dipped.

The latest decline in input costs was the steepest for more than 14 years, when the UK was recovering from the global financial crisis. Reduced workloads have also led to a decline in subcontractor charges for the first time in more than three years.

The outlook for 2024 remains gloomy. The cost of borrowing, the increased difficulties in accessing working capital, an emerging slowdown in public project delivery, together with the obvious ongoing challenges of passing on increased supplier and material costs, will lead to a continuing increase in distress and insolvencies in the construction sector.

Managing construction supply chain insolvency

With more insolvencies expected across the sector in the coming year, construction companies need to pay close attention to risks relating to construction supply chain insolvency and effectively manage them. When faced with a potential insolvency in the supply chain, companies need to take assertive steps – and take them quickly – to best protect their business, project or works from the impact of that insolvency.

Acting quickly to understand exactly the status of a company and a potential insolvency is vital to informing a business’ rights and next steps. Having an understanding of the contractual rights and obligations arising upon an insolvency of a subcontractor or supplier prior to it actually occurring will allow businesses to react quickly and confidently when the insolvency occurs.

Before any decision is taken as to how to respond to a potential or actual insolvency, businesses need to assess the commercial drivers of the struggling subcontractor or supplier. It is important to quickly understand what the payment position is under the contract and to what extent there are outstanding payments due, or about to become due, to the business facing insolvency.

It is also important to understand how critical this subcontractor or supplier is to the project or works – for example, if they are providing a bespoke or specialist supply that cannot easily be procured elsewhere or whether they hold materials or equipment offsite that are critical to the project or works.

Above all, it is critical that businesses act quickly when faced with a potential or actual insolvency. Delay can often see value erode and damage or disruption to a project or works, ultimately increasing the business' costs and losses arising out of the insolvency.