Insolvency spike for construction sector

Trade credit insurer, Atradius (www.atradius.co.uk) is predicting that insolvencies in the construction sector could rise as much as 25% in the next six months despite a rebound in orders.

After contracting by 14% last year, UK construction output is forecast to rebound by almost 15% in 2021 and grow by more than 5% in 2022, says Atradius’ new Industry Trends: Construction report (https://atradius.co.uk/reports/industry-trends-construction-united-kingdom-2021.html).  

The report reveals that commercial construction activity is being hampered by subdued demand for retail and office space, with growth being predominantly driven by residential building and large public infrastructure projects.  However, a shortage of construction materials is leading to delays in project completion.

“With rising orders and output, there are new opportunities building in the construction industry which will continue to drive growth. These include pent-up demand for construction works that were put on hold during the pandemic along with benefits from stimulus measures, an increasing focus on sustainability and growing urbanisation in emerging markets,” says Mike Thomas, Director of Risk Services, Atradius.  

“However, despite the market rebound, competition is intense, profit margins are narrow, late payments are rising and there is a higher proportion of business failures than in most other industries.  With insolvencies forecast to increase further, businesses in the sector must be prepared to weather the storm by sourcing comprehensive real-time data on their buyers, a proactive credit management strategy and protection against non-payment.”

Payments in the construction industry currently take an average of 90 days according to Atradius research, and while the number of non-payments and insolvencies over the past 12 months have been low, these are expected to increase in coming months as government support ceases, and higher material prices and labour costs begin to eat into the financial strength of businesses.  Atradius report margins are already tight, and any slippage could have a major effect on profitability and performance.
 
Atradius experts warns that both material and labour shortages have triggered significant cost increases and this knock-on effect will ultimately squeeze profit margins in the short and medium term, particularly for builders with fixed price contracts.  Should input prices continue to remain overly high, Atradius forecasts insolvencies could increase up to 25% in the coming six months.  Due to the looming downside risks for industry, Atradius’ sector outlook remains ‘poor’ despite the robust rebound in orders and output.