Out-Law News 2 min. read
29 Jul 2016, 3:33 pm
The Insolvency Service has published new statistics that revealed that an estimated 3,617 companies in England and Wales entered insolvency between April and June this year. In the first quarter of 2016 a total of 3,840 companies became insolvent, according to the data.
A breakdown of the number of insolvencies recorded per sector, available only for the first three months of the year, showed that there were 672 insolvency appointments involving construction businesses, more than in any other industry. There were a further 29 construction insolvencies in Scotland during the three month period.
The new figures are in line with previous data which showed that insolvency levels in the construction industry were higher than in any other industry across Britain in 2015.
"Construction insolvencies will continue to be a part of the economic cycle for the industry so long as profit margins for contractors, sub-contractors and suppliers continue to be squeezed to virtually zero especially during recession times," said construction law expert Martin Roberts of Pinsent Masons, the law firm behind Out-Law.com. "The answer has to be a recognition that lowest price does not necessarily mean either design and construction excellence or best whole life cycle value for the client. However, this needs to be combined with a fundamental move away from the current price driven procurement models which too often results in blame and claims."
"The industry needs to move towards procurement models and contractual structures in which the client and all members of the core construction team benefit from working collaboratively to achieve the client’s desired long term outcome with all members sharing in risks and rewards. It will not be easy to change the habits of several generations but the advances in building information modelling technology (BIM), the digitisation of the construction process and the recognition that a collaborative approach is essential in order to take advantage of this new technology may just be the driver the industry needs," he said.
Roberts is the co-author of a recent report issued by Pinsent Masons which identified barriers to more collaborative ways of working in the UK construction industry and made recommendations for change.
The report called for greater use of BIM; changes to standard form contracts and key performance indicators (KPIs) to better incentivise collaboration rather than allocate risk and penalise poor performance; and new insurance models to reflect the different risk profiles of collaborative projects.
Carl Allen, expert in restructuring at Pinsent Masons, said that there are some steps construction companies can take to minimise the risk of insolvency.
"It continues to be a very tough trading environment for the construction sector," Allen said. "Those that can preserve already wafer thin margins, manage labour costs effectively and leverage market intelligence through their commercial, financial and legal advisors will fare better in the turbulence."
Allen said it remains to be seen how the effects of the UK's vote to leave the EU will impact on construction firms.
"Further turbulence is expected for the construction sector resulting from increased pressure on labour costs, the price of foreign sourced materials and a potential decline in business investment, particularly from overseas, in commercial property," he said.
Restructuring specialist Steven Cottee of Pinsent Masons said the Insolvency Service's latest statistics point to a greater number of businesses entering administration in the coming months.
Between April and June an estimated 340 businesses across all sectors in England and Wales entered administration. This represented an 8.2% increase on the number of administrations recorded in the first three months of the year.
"This is evidence that many businesses were already struggling financially pre-Brexit and we can only assume that the number of administrations will increase post-Brexit," Cottee said.