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Economic Challenges Facing the Construction Sector
The UK construction industry confronts significant economic challenges, including inflation, rising material costs, and liquidity issues, leading to reduced demand for construction projects and affecting firms’ financial health.
A Surge in Insolvencies: A Concerning Trend
Insolvency cases in the UK construction sector have alarmingly increased, with Creditors’ Voluntary Liquidations (CVLs) making up 80% of all company insolvencies in Q3 2023, a 3% rise from the previous year and the highest since 1960. Compulsory liquidations surged by 46% in the same period, and the insolvency rate reached 52.4 per 10,000 active companies, translating to 1 in 191 companies entering liquidation. By the end of 2023, 4,378 construction firms became insolvent, a 5.1% increase from 2022 and a 36.0% rise from 2019, indicating the sector’s vulnerability amidst economic difficulties.
The financial strain on the construction industry is further highlighted by the dramatic increase in bad debt, escalating from £400 million at the beginning of 2023 to projections of over £1.2 billion by the end of 2024. This escalation underscores the severity of the crisis, threatening not just individual firms but the entire supply chain, from major contractors to small suppliers.
The Forecast for 2024: Increasing Insolvency Risks
Looking into 2024, the construction sector faces rising insolvency risks, particularly with the end of COVID-19 support schemes. The Bank of England predicts a 20% increase in insolvency filings in Q1 alone. Commercial construction demand is expected to fall by 15%, compounded by Brexit-related labor shortages and material cost increases, alongside a 3% global GDP contraction as forecasted by the World Bank, further impacting the industry.
Strategies for Resilience
To navigate these challenges, construction firms must focus on financial planning and diversifying project portfolios, as those diversifying witnessed 30% better resilience against financial shocks according to Deloitte. Strengthening relationships with financial institutions and suppliers can lead to more favorable credit terms and supply cost negotiations. In addition, modernising risk systems can provide early warnings to potential issues with customers or other businesses in the supply chain.
The Path Forward: Innovation and Adaptation
The industry’s success in 2024 will depend on its ability to adapt and innovate. Firms prioritising flexibility and innovation are better positioned to navigate economic volatility, with those investing in innovation during downturns outperforming peers by 10% in recovery phases, as highlighted by Ernst & Young. At Ontik, we understand the increased pressures in relation to widespread industry insolvencies. That’s why we provide a free service to help you understand the risks associated with your customers. We provide financial, director history, insolvency, and supply chain risk information at a click of a button. Just type a company name and click go; no sign up required. Try out our service here for free.
