There are a lot of businesses in multiple markets that find themselves going insolvent and as such having to go into liquidation. The construction industry is amongst them and is particularly vulnerable to insolvency for various reasons. These include the fact that construction projects are usually complicated and there needs to be a lot of different stakeholders involved in the project for it to work.
If during the process one party becomes insolvent then this can have a ripple effect on the rest of the project as well. It can also lead to subsequent delays, cost overruns and in worst-case scenarios, the project’s collapse as a whole.
The difficulty is clearly personified by the closure of Carillion, construction giants, back in January 2018. This shows that cash flow issues throughout construction can be a problem for organisations of all sizes.
This article is going to talk in more detail about insolvency and liquidation throughout the UK construction industry.
What Is Insolvency Throughout the Construction Industry?
The term ‘insolvency’ means that a company is no longer in a position where it can pay off its debts when they fall due (either because of cash or because of the value displayed on its balance sheet) the value of the company’s liabilities total more than its overall assets. Once a company is insolvent, it may be placed into liquidation, the aim of which is to try and recover all of the company’s assets so that they can be sold and then the proceeds are passed on to the necessary creditors who are owed funds. The liquidation process can be a complex one, which is why a professional liquidator is necessary, you should be sure to look for one which has both the interests of your creditors and your company in mind.
What Are the Dangers of Insolvency in Construction?
In 2018 one of the economic sectors which were hit the hardest was the construction sector as insolvencies represented 17% of them in total (3001 out of a total of 17,454). This upward trajectory continued into 2019 with figures suggesting insolvencies of 18.6% (3198 out of a total of 17,197).
A month doesn’t seem to go by when without news of a major construction company going insolvent, whether this is a high-profile business, a brand which is more historic in nature or even specialist contractors, nobody seems to be safe.
What Are Some of the Most Common Causes of Insolvency in Construction?
There is always going to be an unavoidable lag in the construction industry between the work being performed and payment being received. Contracts tend to provide periodic or stage payments in arrears, which means that the supply chain might carry out a significant amount of work before any kind of payment is received.
Cashflow issues are inevitable but they result in payment delays if organisations need to wait for up to 90 days to receive any kind of payment. In other cases, invoices might not get paid at all. These delayed payments and increasing debts are some of the major triggers of insolvency within construction.
On top of that, a lack of profitability also leads to negative impacts on construction businesses. The sector is a very competitive one, often meaning the lowest price will win the contracts, which means that a lot of contractors end up completing their work, even if they are paid on time, to minimal margins. If there are any costs that the contractor themselves have to bear, such as delays or higher than estimated costs for materials, then this could wipe out the profit from the job completely.
There is also the domino effect to consider, which is the way that a business higher up is impacted directly impacts those below, such as with a contractor and a subcontractor. The failure of one business can go on to have adverse effects on other businesses in the chain which are reliant on income from the project in order to continue funding their work.
Unprofitability Within the Construction Industry
One of the most obvious reasons as to why insolvency is so common within the construction industry is a lack of profitability. There are a lot of firms that operate within this competitive sector so people tend to look at price as well as quality of work, often picking the organisation that can offer the job for the lowest cost.
That being said, following research into the capital productivity of the construction industry shows that the return on investment within it is higher than in some other sectors. In fact, over almost 50 years from 1948 to 1994, the capital which was invested within the construction industry made a healthy return of around 24%, this dominates industries such as manufacturing and agriculture, which only made returns of 9.5% and 8.3% respectively.
There could be an issue coming from higher up too, in that indications look like bigger companies are getting much more of a return than smaller companies are. This will likely be because of the fact smaller companies complete subcontracted work for the larger ones, meaning a lot of the larger businesses’ return is made on the backs of smaller businesses. This means smaller businesses continue to suffer from the issues surrounding profit and are unable to make a significant amount of money in order to be successful.
Does Your Construction Company Need Insolvency / Liquidation Help
The construction industry is quite a harsh one, with lots of businesses struggling to be paid on time and even when they are, struggling to make enough money that will properly sustain themselves. As such, if your construction company is currently struggling, it may be worth reaching out to experts such as Simple Liquidation. Simple Liquidation is an organisation with a team of experts who will sit down with your business to find out more about you and your current situation to provide advice moving forward. If you require any further information or have any questions then please get in touch.