UK construction sector faces insolvency spike

Insolvencies in the UK construction sector could rise by as much as 25% in the next six months despite a rebound in orders, warns trade credit insurer Atradius.

Its experts say that material and labour shortages have triggered significant cost increases for UK construction firms, and this knock-on effect will ultimately squeeze profit margins in the short and medium term.

Should input prices continue to remain overly high, Atradius forecasts insolvencies could increase by up to a quarter in the next half-year period. Its sector outlook remains poor because of “looming downside risk” for the industry.

In its new Industry Trends: Construction report, Atradius says the UK construction sector is benefiting from a robust demand-driven rebound that will see a return to growth after the negative impact of the pandemic.

While the sector contracted by 14% in 2020, UK construction output is forecast to rise by almost 15% in 2021, and grow by more than 5% in 2022.

Growth is being predominantly driven by residential building and large public infrastructure projects, with commercial activity hampered by subdued demand for retail and office space.

But Atradius says that a shortage of construction materials has led to delays in project completion.

It adds that the number of non-payments and insolvencies in the UK construction industry has been low during the last year. But both are expected to increase in coming months as government support ceases, while higher material prices and labour costs “eat into the financial strength of businesses”, it warns. The report says margins are already tight and any slippage could have a “major effect on profitability and performance”.

Mike Thomas, director of risk services at Atradius, commented: “Despite the market rebound, competition is intense, profit margins are narrow, late payments are rising and there is a higher proportion of business failures than in most other industries. With insolvencies forecast to increase further, businesses in the sector must be prepared to weather the storm by sourcing comprehensive real-time data on their buyers, a proactive credit management strategy and protection against non-payment.”

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