There is a worrying trend in the construction industry: contractor insolvencies are on the rise.
According to a release from The Insolvency Service, the construction industry accounted for 3,213 insolvency cases in the 12 months leading up to April 2022. This equates to almost a fifth (19%) of the overall cases of insolvency and, more worryingly, these numbers are still growing. These insolvencies have occurred throughout the market but have particularly affected smaller and mid-tier contractors.
This article looks at the factors behind these rising contractor insolvencies, the warnings signs for employers, and offers some guidance on how to protect themselves from the risks.
Historically, the narrow margins on which contractors operate have made them particularly prone to insolvency. However, the emergence of various aggravating factors within the market has only served to further squeeze contractors’ profit margins and increase the risk of insolvency.
Many contractors do not have extensive fixed-cost nor long-term supply chains. Accordingly, they are prone to exposure when entering into fixed-price contracts. They also take on the risks of late completion should their supply chain fail to deliver.
In the UK, construction costs continue to significantly rise and contractors are battling increasing inflation rates, most recently driven by the surge in energy prices. The rising costs of raw materials for contractors are a result of unprecedented demand in the market combined with a breakdown in supply chains created by factors including Brexit, Covid-19, the Ukraine War and most recently, a weakened pound following turmoil in the markets resulting from the Truss-Kwarteng min-budget. Finally, this has all been exacerbated by global shipping problems and further logistical issues for suppliers to the sector.
Employers need to be aware of this situation as many are being asked for additional monies under their contracts, despite the lack of contractor entitlement to the same. Employers will need to balance these demands against current inflationary pressures and the need to complete projects, especially if their contractors are already under financial strain.
The consequences of these market conditions include lower margins - or even losses - for contractors who were already reeling from the impact of the pandemic. Accordingly, there is already a significant increase of insolvencies in the sector and, as such, particular thought and consideration is needed as to whether support should be given to a contracting party at this time.
The following trends are five good indicators to which employers should pay particular attention in the current market:
Below are some guidelines that employers should follow when considering the appointment of a contractor to undertake a construction project.
Given today’s market and continuing economic landscape, employers should be taking precautionary steps to mitigate risks and consider what to do in the event that a contactor or delivery partner become insolvent.
Penningtons Manches Cooper is ideally placed to assist you. We have significant expertise and experience in dealing with such matters, both practically and legally. Whether you are concerned about entities you are contracting with or you are suffering issues linked to squeezed margins, slow-downs on site and/or any insolvency concerns, we can assist you. Ultimately, the aim of our advice is always to put the best solution in place for your business, giving regard not only to the legal position but also to the commercial and practicalities of the affected scheme and your desired outcome.
If you would like to know more, please contact Peter Massey.
+44 (0)207 457 3076