40,000 UK construction firms at risk of failure by April
"Just under 40,000 UK construction firms face insolvency by the end of April, according to Red Flag Alert data.
It warns their collapse would mean £2.2bn in unpaid invoices are at risk of disappearing from construction supply chains.
The latest ONS data focusing on the business impacts of COVID-19 shows 13.6% of construction companies have low or no confidence that their businesses will survive the next three months - a predicament affecting 39,491 firms.
Red Flag Alert data reveals that when companies go out of business, they now leave behind an average insolvent debt of £55,949.
Managing Director of Red Flag Alert, Mark Halstead, said the level of insolvent debt in the construction sector is already growing at pace. It increased by 6.6% in 2020, double the rate of growth in total UK insolvent debt.
"This increase in debt could have been much higher and was supressed by the Government’s coronavirus support measures. Construction companies realise this and are lacking in confidence as they know COVID-19 grants, loans and furlough payments can’t last forever," he said.
As well as reliance on Government support, Halstead attributes low or no confidence in survival amongst construction companies to dwindling order books. The latest IHS Markit / CIPS UK Services PMI data shows construction output declined for the first time in eight months in January.
"PMI data shows shrinking order books in the services sector, which means work is drying-up for construction firms," adds Halstead. "Locked-down city centres is putting large-scale development projects on hold, which affects companies of all sizes throughout construction supply chains.
“Revenue for construction firms is disappearing fast and struggling companies are facing up to the prospect that they don’t have the cash flow to keep going much longer. Operators throughout the sector need to move quickly to call-in outstanding debts, before it’s too late and invoices are lost to insolvency. At this point, they won’t be worth the paper they’re written on.”
PwC expects to see the UK unemployment rate jump by a record 2.5 percentage points in Q2, as the government’s furlough scheme ends.
Contractor issues head disputes list in 2020: Arcadis report
The average value of disputes globally rose from $30.7 million in 2019 to $54.26 million in 2020, while the length of disputes fell from 15 months in 2019 to 13.4 months, according to an Arcadis report.
The data, featured in Arcadis' 11th annual report, illustrates industry-wide ripple effects of the COVID-19 pandemic although interestingly the overall volume of disputes stayed relatively the same in 2020 as in 2019.
While trends in the value and length of disputes varied from region to region, all regions surveyed saw an increase in "mega disputes" related to bigger capital programs and private projects. Notably, more than 60% of survey respondents encountered project impacts due to COVID-19.
Owners, contractors, or subcontractors failing to understand and/or comply with their contractual obligations became the leading cause of construction disputes in 2020 (jumping from 3rd place in 2019), followed by owner-directed changes and third-party or force-majeure changes as the second and third-leading causes, respectively.
Highlights from the report include:
- Proper contract administration was a theme across the globe for the successful and early resolution of disputes
- Most disputes were settled through party-to-party negotiation, and a willingness to compromise played a key role in early resolution
- Among regions surveyed, the buildings (education, healthcare, retail/commercial, government) sector saw the most disputes
- In North America, construction dispute value rose from $18.8 million in 2019 to $37.9 million in 2020, while the length of disputes shortened from 17.6 to 14.2 months.
While cost and length have changed since 2019, risk management was still seen as the most effective claims avoidance tactic, while owner/contractor willingness to compromise was once again the top-ranked factor for the mitigation/early resolution of disputes.
"COVID-19 irrevocably changed every industry," said Roy Cooper, head of contract solutions for Arcadis North America. "Construction disputes experts will have to continue to adapt, even post-pandemic, as workforce expectations, climate events and government infrastructure funding change how projects are designed and contracted in the future."
The research presented in the report was compiled by Arcadis based on survey responses, global construction disputes the team handled in 2020 and contributions from industry experts.