Ask the Expert: Construction survival
All answers are for general guidance only. Each case must be handled on the individual facts.
Q: How do you expect construction companies to perform for the remainder of 2011?
When the credit crunch kicked off in 2008, many commentators predicted a tsunami of contractor insolvencies would rapidly follow. This is wide of the mark with overall corporate insolvencies falling by about 18 per cent from 2009 to 2010 year on year. However, the construction sector is beginning to show signs of bucking that trend.
The latest research shows that the number of construction insolvencies rose by 19 per cent to 948 in the first quarter of 2011 from 796 recorded in the last quarter of 2010 – this only reinforces the ‘lag and drag’ nature of contractor insolvency, following a downturn.
There are fewer construction contracts being awarded and the ongoing public sector cuts to major initiatives will continue to have a severe impact on the industry. Contractors have been slashing tender prices dramatically to secure new work – even at negative margins. For many, the choice has been to either fail through running out of work; or to at least secure some work – even at suicidal bid prices – to survive.
Construction projects are extremely complex and, as a result, an insolvency event anywhere within the supply chain can have a huge impact – both ‘upstream’ and ‘downstream’. Understandably, trading partners are becoming far more nervous as it is extremely difficult to predict where or when an insolvency event may occur. The insolvencies of Connaught and Rok in 2010 continue to have an impact on their numerous trading partners.
Meanwhile, plenty of baggage is being piled onto contractors – which is normally ‘carried along’ by them in the good times. The load may become heavier still. HMRC, for example, provided a short respite and was tolerant of late payments but is now taking a much tougher stance.
Another key factor is that interest rates have remained at historically low levels but this may only be a temporary solution.
Some contractors will survive the current difficulties only to stumble on what is to come with an upturn in the economy. Our expectation is that the level of insolvencies in the sector will continue to rise for some time to come. With this in mind, contractors should seek and take professional advice sooner rather than later to ensure their business survives healthily rather than collapses to the ground.
Contact details
Adrian Allen is a partner at Baker Tilly Restructuring and Recovery LLP covering the East Midlands and Yorkshire regions.
01733 260780 / 0113 285 5000
adrian.allen@bakertilly.co.uk
Meet our local team: http://www.bakertilly.co.uk/services/recovery/east-midlands-team.aspx
Read more from Baker Tilly Restructuring and Recovery www.bakertilly.co.uk/evolution
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