The number of UK construction companies at significant risk of closure has jumped 54 percent to 16,755 this quarter, up from 10,686, according to fresh data shared with City A.M. this morning.
Construction companies are struggling to cope with spiraling construction costs, inflation and rising interest rates on their debt.
In the last quarter alone 5,900 more construction businesses have been added to the “at significant risk of insolvency” category, the data from audit and tax firm Mazars shows.
Surging prices for essential materials have had a significant impact on the construction sector.
According to the UK’s latest Government’s Building Materials and Component Index, material prices increased 24.1 percent in the past year.
The sector had exited the pandemic in a weakened state, with supplies of essential materials such as bricks, timber, and cement already severely disrupted. These costs are now continuing to rise due to the conflict in Ukraine.
“The construction sector has been one of the hardest hit by inflation. Prices rises for construction materials have had a huge impact on the ability of a construction company to control costs on a project,” explained Rebecca Dacre, Partner at Mazars.
“They are now faced with the dilemma of how they recover costs soaring away on a fixed price contract,” she told City A.M.
“Poor cashflow is an endemic problem in the construction industry so it doesn’t take much to undermine the solvency of many construction companies,” Dacre continued.
“Many construction businesses took on more debt to get them through lockdown. Due to interest rate rises, they are now seeing the cost of these debts soar, just as the economic outlook is worsening,” said Rebecca Dacre.
“Rising interest rates may hit new build residential property builders at the worst possible time, as consumer appetite to take on more expensive mortgages will cool.”
Construction companies, like many sectors of the UK economy are also struggling to hire enough labour. A lack of supply in labour to the industry is causing a further blow to companies’ cash flow, by hindering their ability to complete projects on time and get paid.
According to Mazars’ data, East Anglia, the South West and South East have seen the largest increases in construction business at risk, with 74 percent, 72 percent and 58 percent increases respectively.
Dacre concluded: “For many businesses across the construction sector, Government help with energy bills cannot come soon enough. Some will be trying desperately to hang on until the relief package kicks in.”
Source: City AM