Construction projects risk being derailed by increasing insolvencies in the sector as firms continue to struggle with the effects of heightened inflation, consultant Turner & Townsend has warned.
The firm’s latest market intelligence report says insolvencies rose 72% in the second quarter of 2022 compared to the same period a year ago, with some 3850 British construction firms having become insolvent over the last 12 months.
“Few things derail a project so quickly and severely as the failure of a key supplier,” it warns, adding that spotting the ‘tell tale signs’ of supply chain distress – which could include defective work and increased adversarial practices – must now be at the forefront of industry thinking.
“When a contractor falls into insolvency, the impact is instantly apparent – works are left incomplete and key suppliers and sub-contractors not paid,” the report says. “The sequential nature of construction means that knock on delays soon follow. Over time, the fallout from an insolvency typically leads the final cost to far exceed the client’s original budget.”
The recent increase in insolvencies is attributed partly to the withdrawal of Covid-era support measures including the Furlough scheme. This initiative, it is pointed out, “allowed many contractors with weaker balance sheets to enter a ‘suspended animation’ and arguably delay the inevitable”.
It adds that, with the current inflationary pressures facing the industry, contractors which have already submitted a bid or started work on a project will be forced to pay elevated materials prices that they struggle to pass on. “In an industry with already tight margins, this pressure could rapidly push the weakest firms to the brink”.
This could soon see insolvency risk overtake inflation as the most common barrier to project success in the sector, the report emphasises. It also says rising input costs are likely to translate into higher tender prices, variations and legal claims on projects.
Turner & Townsend’s UK managing director of cost management Martin Sudweeks said: “Businesses need to be more alert to insolvency risk across their supply chains as the long term impact of the pandemic begins to sink in and the fiscal crutches offered by government are removed.
“It’s essential to spot the tell tale signs of insolvency risk early; those include low productivity, difficulty securing labour or materials and failure to pay suppliers. To be prepared, build trust and open communication within your supply chain.”
Originally published in Construction Law – a membership site with limited access for non-subscribers