The construction industry in the UK is facing significant financial challenges, with insolvency rates reaching worrying levels. Recent reports show that construction firms accounted for 17.3% of all insolvencies in England and Wales in April 2024, with 399 registered businesses becoming insolvent.
In the past year, over 4,400 construction firms have gone under, marking a 7.6% increase from the previous year—and a staggering 36.8% increase since 2019. This dramatic uptick lays bare the sector’s vulnerability, not helped by complex contract cycles and cash flow management issues.
With the Labour Party winning the general election by a landslide, all eyes are on their proposals and the implications for the construction industry as a whole. In this piece, we’ll take a closer look at insolvency and how Labour’s proposals might impact the industry.
What does insolvency mean in business?
First things first: what do we mean when we talk about insolvency? In business, insolvency means a company can’t pay its debts on time. There are two main ways this can happen:
- Cash flow insolvency, which is when the company doesn’t have enough cash or easily sellable assets to cover its debts.
- Balance sheet insolvency, which is when the company’s debts are greater than its assets, even if everything was sold.
In both situations, insolvency represents a serious financial issue that calls for quick action to reduce the negative impact on everyone involved. Possible outcomes of insolvency include:
- Restructuring: Working with creditors to change debt terms.
- Administration: An administrator comes in to try to save the company or get better results for creditors.
- Liquidation: Selling off assets to pay debts; often leads to the company closing.
- Bankruptcy: For individuals or sole traders, this means legal proceedings to distribute assets to creditors.
Rising insolvency rates in the construction industry
Construction continues to top the charts when it comes to insolvency rates in the UK. While the current rate is lower than the peak during the 2008-09 recession, the steep increase from the lows of 2020 and 2021 is concerning. To put that into perspective, the overall insolvency rate between June 2023 and May 2024 was 55.6 per 10,000 companies, a fair bit lower than the recession peak of 113.1 per 10,000.
Within the sector, construction firms specialising in subcontracted activities like demolition, site preparation, electrical, and plumbing installation are the most affected. The nature of these types of projects, usually involving fixed-price contracts and fluctuating costs, only contributes to the problem of financial instability.
The Labour Manifesto: Implications for construction
With Labour now firmly in the driving seat, the potential impact of Keir Starmer’s manifesto on the construction industry is a topic of significant interest. Historically, Labour has advocated for increased public spending and infrastructure projects, which might provide some much-needed relief to the struggling sector. However, any shifts in regulatory frameworks or tax policies could also pose new challenges for construction firms. Let’s take a closer look at those policies:
- Housing and development
- Building 1.5 million homes: Labour has committed to building 1.5 million homes over the next parliament, prioritising the construction of social rented homes to address the intense shortage of affordable housing.
- New towns and urban development: The manifesto includes plans to create several new towns, with a focus on sustainability and infrastructure. Compulsory purchase compensation rules are also set to be reformed to help speed up the delivery of new homes.
- Affordable and social housing: Labour intends to strengthen planning obligations to ensure new developments provide more affordable homes. There will be a focus on giving first-time buyers the first chance to purchase new homes and preventing entire developments from being sold to international investors.
- Planning reforms
- Updated planning policies: Labour plans to update national planning policy to meet the needs of a modern economy, making it easier to build essential infrastructure such as laboratories and factories. Local Growth Plans will be introduced with a statutory requirement for town regeneration schemes to include supporting infrastructure like road improvements and GP services.
- National Infrastructure and Service Transformation Authority (NISTA): A new authority will oversee a ten-year infrastructure strategy, focusing on improving rail connectivity, fixing potholes, and being better prepared for extreme weather events.
- Skills and employment in construction
- Skills England: Labour proposes the creation of ‘Skills England’ to tackle the skills shortage in the construction industry. This includes boosting apprenticeship numbers and investing in training for green energy skills.
- Retrofitting and green jobs: The manifesto outlines plans for a Warm Home Plan to boost the retrofitting of homes, which will not only improve energy efficiency but also create jobs in the construction sector.
Overall, leaders across the construction industry have welcomed Labour’s proposals, with the proposed planning reforms and investments in skills development highlighted as clear steps in the right direction. That said, there are calls for even more robust measures to address the skills shortage exacerbated by Brexit to ensure the successful implementation of these plans.
Final thoughts on insolvency and the UK construction industry
The construction industry in the UK is at a critical juncture, grappling with high insolvency rates and economic uncertainties. The arrival of a new government adds another layer of complexity, with potential policy changes that could significantly impact the sector. By staying informed and adopting effective financial management strategies, construction firms can navigate these challenging times more effectively.
Find out more about how we handle insolvency cases here at Coyle White Devine. We’re always here to help.
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