Top Service News
THE WALLS OF JERICHO
Published on
Is the construction industry on the brink or are statistics misleading?
By Philip King.
Since 2021, the construction sector has accounted for almost one in five of all corporate insolvencies. The percentage has ranged between the lowest of 15.1% (November 2024) and the highest of 20.4% (February 2022). The percentage for all corporate insolvencies across the 10-year period from 2015 to 2024 was 17.7%, or one in every 5.65. Sadly, there’s little to suggest the number’s going to change any time soon.
The latest Government Office for National Statistics (ONS) trend figures over three months reveal an industry in stagnation, recording no net growth overall. The S&P Global/CIPS UK Construction PMI in March remained in contraction, with new orders declining for the third month in a row, and just 40% of firms expecting output to rise in the coming 12 months. The more recent Flash Composite PMI for April slid to a 29-month low of 48.2.
At the time of writing, many are predicting a cut in the Bank of England interest rate from 4.5% to 4.25% in May. While this can be beneficial for small firms that rely on borrowing, it can also lead to companies taking on debt that can hide underlying financial problems. It’s a time to be watchful and wary.
Fixed-price challenges
Firms in the construction sector struggle when fixed-price contracts prevent them from passing on rising costs. Also, cash flow suffers from hikes in material costs, project delays, and supply chain disruption. Costs are increasing, both through National Insurance Contributions and a rise in the minimum wage. Inflation is still an issue, as is the uncertainty arising from tariffs being imposed by the US. As such, it’s reasonable to assume the rate of insolvencies is unlikely to diminish across the rest of 2025.
Brendan Clarkson of PKF Littlejohn Advisory agrees. He observes that Compulsory Liquidations in February 2025 reached their highest level in 10 years as a result of HMRC and local authorities stepping up their activity and showing less forbearance than had hitherto been the case. The total in February 2025 was 49% higher than in February 2024.
Creditors are also becoming more proactive in pursuing outstanding debts and are increasingly resorting to legal action. His firm is seeing a rise in enquiries for restructuring and insolvency support, with directors seeking specialised advice on managing their business finances amidst escalating costs. Small businesses, in particular, find it challenging to pass on additional costs to customers while still wanting to remain competitive.
So what are things like on the ground? I’ve talked to some Top Service clients and members to get their views on the year so far.
Reduction in overdues
There’s a consensus that collections have performed well; relatively few bad debts have been experienced and, generally, they are of low value. A reduction in overdues is also being seen and, where customers are struggling, more are taking a proactive approach to arranging payment plans. This is a positive sign of a willingness and desire to honour debts rather than walk away and leave the supplier unpaid.
There’s less common consensus on the commercial front, however. Some have seen sales start to pick up and are feeling positive, opening more new accounts than ever, while others say trade has not increased to the levels they’d anticipated and that it’s a battleground to win business. One member observed that things are eerily good and they’re waiting for a shock!
I also asked what their main current ‘pain-points’ were and identified a variety of issues. Taking decisions without adequate information was high on the list. There are a number of reasons for this: companies filing minimum information or having no requirement to file because they are so new, and the resulting unavailability of credit insurance leading to trading at their own risk.
Requests for payment plans, and customers seeking increased credit limits, also featured. A particular difficulty was granting more credit when customers were unwilling to provide additional information, such as management accounts or draft statutory accounts. Handling the commercial pressure to offer more credit in these circumstances was also a factor causing pain.
Account analysis
One member highlighted the difficulty of reaching any form of conclusion from analysing year-on-year accounts. Everybody has had a tough year, and the majority of accounts show negative movement. Success lies in determining which had a tough year and are weathering the storm, and which had a tough year and are on their last legs.
There was common recognition of increasing instances of fraud, and the need for greater vigilance and better avoidance systems. One single instance can have a devastating impact on a company’s survival, so it’s an area that needs constant focus.
In general, and particularly in regard to collections performance, it seems that experience at the coal face is better than suggested by the more general insolvency statistics and predictions. I see a couple of possible reasons for this. Firstly, the impact of increased employment costs, US tariffs, and rising employment costs have yet to be fully felt, and it may be a matter of timing. Secondly, it’s likely that these Top Service members have best practice credit management processes, get real-time shared payment experience, and have effective systems in place. They’re more adept at spotting risks and warning signs, at being proactive in managing and minimising overdue debts, and – as I said in my last contribution to this magazine – at being willing to give and receive information about their customers which puts them on the front-foot.
Philip King FCICM is a non-executive director at Top Service Ltd