Any decrease in construction opportunities will consequently mean increased
competition – simple supply and demand economics. This could potentially see
contractors’ margins being squeezed. Recent BCIS forecasting suggests that All-in
Tender prices are to flatten over the coming two years, despite material and labour
costs continuing to rise. Whether some of these companies can cope with smaller
margins, especially with the prospect of interest rate rises, remains to be seen.
A recent BCIS publication states that construction material prices have increased
significantly over the past year, with the increases affecting all sectors of the industry.
Prices were falling month on month until January 2016 but have been rising steadily
ever since. Current forecasts are that a rise of between 3.5% and 6% (year on year) is
expected over 2017 and 2018 — how much of this increase is down to the fall in the
value of sterling is not clear. However, it is clear that the fall in the value of sterling has
had some influence on these prices, exacerbating the increases in the prices of traded
commodities. A recent article in the ‘Construction Index’ also said that:
“A 20% rise in the price of timber and other building materials is leading to builders
having to rapidly re-evaluate the price of their jobs, while those on fixed price contracts
are at risk of getting their fingers burned…More than 70% of smaller building firms
have experienced increased costs as a result of the weakened currency. A quarter of
all materials used by the UK construction industry are imported – this is significant and
underlines the vulnerability of the industry to sudden fluctuations in the strength of our
currency. The combined pressure of higher material prices and the rising cost of skilled
labour represents a serious challenge to builders.”
This may further impact on Contractor’s margins,
particularly on existing Contracts. There is also
the risk that Brexit may have a further impact on
labour; the supply of which is already considered
lower than the required levels in the industry.
Whilst the economy and the construction industry
generally remains in a strong position, it will be
interesting to see what real impact Brexit will
have both short and long term. Developers (and
Employers) should be mindful of the potential
adverse effects that Brexit or rising interest
rates may have on the Construction Industry
and whether this leads to increased construction
related insolvencies. It is important to look out for
warning signs of a potential contractor’s insolvency, which can include:
• Slowdown in progress on site;
• Decreased number of trades / site operatives (unexpectedly);
• Plant, equipment and materials leaving site;
• Contractor’s seeking increased advance payments (given the declining credit with
their suppliers);
• Standard of work declining.
CONSTRUCTION INSOLVENCY - CONT’D
