By Brendan Clarkson, above, Director, PKF Littlejohn Advisory
The construction sector in the United Kingdom is on the cusp of a significant transition. It is projected that a decline in interest rates towards the latter part of this year, in conjunction with a resurgence in supply chain efficiencies, may lay the groundwork for industry expansion. Although not completely resolved, the supply chain appears to be stabilising.
Nevertheless, vigilance is advised as the threat of insolvency persists among suppliers, particularly those still grappling with the economic aftershocks of the COVID-19 pandemic. Additionally, challenges including a reduced appetite for public spending and private investment, and a declining industry workforce, continue to pose risks to the sector’s recovery.
In July 2024, there were 2,191 company insolvencies in England and Wales, 7% lower than June 2024 but 16% higher than July in the year prior, according to Company Insolvency Statistics. This number is still a great deal higher than during the COVID-19 pandemic and the 2014-2019 period. Many of these insolvencies can be attributed to an unstable, and indeed unpredictable political and economic environment, a byproduct of a busy election year across the globe, compounded further by the continuously high cost of doing business.
Trends for the construction industry
In recent years, the construction industry has experienced significant cost volatility, particularly in terms of material expenses. A shortage of global raw materials, and the consequently increased demand for them, has played a large part in the demise of many businesses in the wider sector. It has also resulted, however, in the dissolution of many distributors and suppliers, leading to delayed shipping times and a requirement for overseas sourcing, which bears significant cost.
The introduction of new materials has similarly placed additional pressure on the sector. While new materials promise long-term savings and sustainable benefits, they could drive costs higher in the short term.
In addition to these challenges, the UK construction industry is having to address significant labour shortages. According to recent reports, the sector needs an additional 251,500 workers by 2028 to meet expected demand. Key trades such as carpenters, bricklayers, and plasterers are in particularly short supply. This shortage is driving up costs and creating delays in project timelines. Efforts to address these shortages include adding key construction roles to the shortage occupation list to encourage skilled migration. However, the industry must also focus on training and retaining domestic talent to ensure a sustainable workforce for the future.
Given this complexity, strategic planning and effective cost management is essential for the industry to successfully navigate these financial challenges.
Addressing concerns for the future of construction
Emma Reilly FCICM from Top Service, an expert in construction industry debt recovery, predicts that the UK construction sector is projected to experience a modest decline in activity for the rest of 2024, with growth anticipated to resume in 2025. The upcoming year is expected to bring a significant shift in the sector, with spending moving from repair and maintenance (R&M) activities to new builds. This too follows the priority of the recently elected Labour Government.
“Historically, R&M spending has shown resilience during economic downturns, maintaining steadier demand. However, the current economic climate, characterised by higher borrowing costs, is reshaping spending patterns,” she says. “This shift indicates a reorientation in the industry’s focus, prioritising new construction projects over repair and maintenance work. It’s a change that reflects both a response to consumer demand and a strategic adaptation to the evolving economic landscape.”
The residential sector, especially new build residential output, continues to be the most significantly impacted segment within the UK construction industry. The sector has experienced a sharp decline, primarily due to the compounded effects of high interest rates, which have resulted in increased mortgage costs which make home buying less attainable.
Meanwhile, the construction industry is witnessing a rise in insolvencies, underscoring the growing financial pressures and challenges within the sector. This trend is particularly pronounced among mid-sized contractors and developers, who are having to contend with inflation and a reduction in new project starts. Additionally, securing performance bonds and credit limits has become more difficult as financial institutions adopt a more cautious approach due to market instability. This rise in insolvencies highlights a broader concern regarding liquidity and financial health in the industry, prompting firms to adopt more a cautious and strategic approach to financial management and project planning.
Businesses in the construction industry need to prioritise prudent financial management to thrive in a tough economic environment. If they sense difficulties, then seeking help early, in turn, means that restructuring professionals have more options available to them to help steer the ship, and leave you to focus on business growth, rather than a fight for survival.
