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Construction sector insolvencies: help and advice for firms in financial distress

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Construction sector insolvencies: help and advice for firms in financial distress

Reviewed: 25th August 2016

The construction industry remains in crisis this summer as the number of insolvencies continues at the highest level of all UK sectors. Between January and March this year there were 672 construction sector insolvency appointments in England and Wales, according to Insolvency Service figures. 

Although annual insolvency totals have fallen during the last few years, construction firms continue to battle industry-specific problems alongside external issues such as Brexit, which is expected to affect this and the real estate industry most significantly.

So what are some of the problems being experienced within the building industry, and how can failing businesses be helped?

Brexit and the inevitable economic uncertainty

Although leaving the EU is an issue being faced by all industries, construction has experienced serious problems since the referendum. The Purchasing Managers’ Index (PMI) survey for June, carried out by Markit and the Chartered Institute of Procurement and Supply (CIPS), reported the “fastest overall decline in construction output since June 2009.”

Post-referendum economic uncertainty was said to be a major factor in the results of the survey, with risk-averse clients reluctant to invest under such unpredictable conditions. It’s been suggested that investors should adopt a cautious approach during the next few months whilst the country deals with the vote to leave, rather than cancel arrangements for their planned construction projects.

Non-collaborative culture encouraging conflict

The current procurement culture is driven by the lowest available price, but this could be improved using a collaborative approach between the main contributors to a construction project.  

If key contractors and suppliers share the levels of risk proportionate to their involvement when joining a project, as well as enjoying their share of the rewards at the end, it could encourage a higher quality product borne from a more cost-effective process, as well as greater satisfaction among clients.

Contracts purposely set up to ensure all key project members have sufficient incentive, and benefit from working with each other, may result in the industry being able to rescue itself. Less conflict between construction team members could lead to greater value for money for the end-client, and a lowered risk of insolvency for all members of the core team.

New technology, insufficiently used

New technology in the form of building information modelling, or BIM, is central to this collaborative approach, which at some point may become the norm in construction. Clients, main contractors and sub-contractors, are now able to access online designs and information about a project, and make changes in real time as it progresses.  

A report by law firm, Pinsent Masons, also recommended the introduction of new insurance models that mirror the levels of risk adopted by the various members of a collaborative team.

This would ensure fewer companies headed towards insolvency as a result of poor risk management, and provide the protection they needed to tender for work with confidence.

Professional advice for construction companies experiencing financial distress

It’s advisable to seek professional insolvency advice at an early stage. This leaves more options open, and provides a greater chance of rescue and recovery. Various routes may be available for construction companies in the grip of insolvency, including Company Voluntary Arrangements (CVAs), Creditors’ Voluntary Liquidation (CVL), and pre pack administration.

Once an insolvency path is established, creditor action ceases and interest/charges on the debt are frozen. In the case of a CVA, directors even remain in charge of the company whilst attempting to trade their way out of difficulty.

If additional financing would be beneficial, Real Business Rescue has contacts with over 50 different lenders in the UK who may be able to provide the boost in working capital that’s needed to survive.

Our team are construction industry specialists, with wide experience of returning companies to profitability. As a major part of the Begbies Traynor Group, we help companies in distress to turn business around.

For those already insolvent we can explain all the available routes, and analyse the business to determine their best option. Call one of the team for a same-day appointment in complete confidence. With 55 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

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