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The number of administrations in the construction industry dropped to the lowest level for seven months in January.
There were 12 administrations in the first month of 2022, according to data collected by Creditsafe. This was the lowest rate since June 2021, when seven failures were recorded, and reversed the broad trend of a growing number of administrations since the summer.
The total marked a fall from the 20 administrations observed in December, which followed 19 business collapses in November and 23 in October.
Interpath Advisory director Neil Morley said the sudden drop in January could be a temporary blip that's reflective of disruptions caused by the Christmas break, when most of the industry closed for a fortnight, thereby putting the brakes on cashflow. He said companies in trouble often anticipate this and will start administration proceedings in November, which bumps up the December figure.
However, while January's decline was not unusual, Morley highlighted that insolvencies – including liquidations – were still well below pre-pandemic levels. In January 2020, 22 construction companies went into administration. “If you think about what we're dealing with in the sector, in terms of the increased raw material prices [and] labour inflationary pressure, you would have expected to see a lot more insolvencies at the back end of 2021," he said. "And I still expect to see them in 2022.”
Aside from those inflationary pressures, action by HMRC could also tip some contractors into insolvency proceedings. At some point the tax collector is going to start more aggressively pursuing businesses that owe it money. “I imagine HMRC will start to drip-feed their action, and then they will start to ramp up as the year goes on,” Morley said.
He added that more contractors are being proactive about financial challenges, and he has seen a rise in inquiries about company voluntary arrangements (CVAs). These involve firms speaking with creditors and customers to renegotiate contracts and payment schedules while they trade through difficult periods. "We are seeing more businesses off the back of O'Keefe and others starting to come to us and say 'What are our options? We know we've got a problem on this contract, how can we deal with this because if we're not careful, this is going to bring our business down," he said.
Civils firm O'Keefe secured a CVA in September after it suffered a "significant loss". A CVA can take three or four months to execute, however, making it unviable for companies already facing severe cashflow problems, he added.
Eyes on April
Ben Harwood, finance director at consultancy Naismiths, said a future increase in administrations remains likely. He said: "We still think it's going to happen. My current opinion is that it may be in April or May time. We have seen an increase in distressed companies and enquiries about how things can be turned around."
Harwood added that there is currently a willingness among some clients to put more money into projects rather than let firms go under at the moment. However, inflation and the forthcoming rise in employers' National Insurance contributions could have an impact in future.
"With cost increases and government support going down, if you were a middling-to-struggling business before the pandemic, you may struggle," he said.
But Max Jones, a director in Lloyds Bank’s infrastructure and construction team, noted that the sector is feeling confident, as shown by the six-month-high reading in January's Purchasing Managers' Index (PMI), which tracks growth. He said: "A surge in commercial work, evident in the most recent PMI reading for the sector, allied to optimism about the rollback of pandemic restrictions and the continued strength in civil engineering, which is underpinned by ongoing government investment, is providing a strong backdrop for UK construction.
"There has also been some evidence that supply chain and cost-inflation pressures are easing from the peaks seen in Q4 2021, enabling the sector to deliver on existing project timelines and increasing confidence in clients to place new orders. These factors combined are leading to a feeling of confidence."
The two largest firms to go into administration in the month were £80m-revenue PDR Construction of Hessle, East Yorkshire, and Manchester-based contractor and developer Beaumont Morgan Developments, which turned over £47.2m in its latest filed accounts. National firm PDR had about 115 staff, all of whom were made redundant ahead of the administration, which was blamed on the impact of the pandemic on contracts, as well as a “significant” recent failed adjudication for which details have not been divulged.
Beaumont Morgan focused on residential projects in Manchester and the North West. In recent years, it worked primarily as a residential contractor for Fortis Developments. It had attempted to diversify in recent years and employed about 60 people, according to its last set of accounts.
BY: IAN WEINFASS