It is already well documented that the UK construction industry is under pressure, and has been for some time. It has been significantly impacted by the economic crisis, with the sharpest fall in output recorded since 1974. This reduction has been further compounded by the UK Government’s austerity measures that will see more than £90 billion of capital spending cuts between 2010 and 2014. The situation will get worse before it gets any better.
The current doldrums have resulted in a number of business failures, not just of prime contractors. Indeed the main impact has been on those further down the food chain, and the more specialist contractors and suppliers whose order books have dried up, or who have failed to effectively manage their cashflow effectively to survive the current downturn.
One such business was WF Utilities & Groundworks Limited that was obliged to call in the Administrators – SFP, the nationwide insolvency practitioners – after it accrued debts of approximately £400,000.
Established as a specialist contracting company in 2010, WF Utilities & Groundworks provided utility infrastructure and construction services, including repair and maintenance, as well as working on large scale complex projects for commercial, industrial, defence, local authority, water and gas utility sectors. The company, which was based in Yeovil, Somerset, employed 24 subcontractors and two other members of staff and had an annual turnover of around £2 million. SFP was appointed Administrators on 20th June 2012.
The failure of WF Utilities & Groundworks is by no means unique, and there is real concern that with various new projects being delayed or postponed indefinitely – especially within the public sector – failures within the construction industry may increase in the second half of 2012. With public sector spending on construction projects estimated to represent about 40 percent of the industry’s output, the effect of the downturn in Government contracts is likely to be widespread as companies scramble to fill the void left by the reduced public spending.
There is particular concern, also, for those who were relying on Olympic projects to see them through the current uncertainties – especially as those projects have now come to an end. Although the Olympic building project has been a success, with 98 percent of the estimated £6 billion of new work being awarded to UK firms, a large number of smaller subcontractors in the finishing trades are now confronting lower levels of work and thinning order books.
Daniel Plant, Group Partner at SFP, says that the construction industry remains volatile at best: “Notwithstanding the success of the Olympics, the level of private sector work has not been enough to compensate for the shortfall in public spending,” he says. “Companies in construction and related sectors are having a hard time of it at the moment, and for those who fail to manage their cashflow effectively, the results can be terminal.”
Fortunately for WF Utilities & Groundworks, SFP has been able to arrange a successful management buy-out (MBO) of the business, thus safeguarding a number of positions within the firm, and ensuring a continuation of service to clients of the business. Daniel believes that seeking help from a professional insolvency practitioner at the first sign of trouble is the key to a successful outcome, and expects to be helping many more construction businesses in the coming months: “There has been a noticeable increase in larger building contractors moving down the ‘food chain’ as contract sizes and numbers continue to shrink,” he says. “This in turn creates increases competition, erodes margins and puts intolerable pressure on prices. Experts are predicting that this will have a major impact on sub-contractors, electricians, plumbers and builders’ merchants as well as the rest of the chain that makes up the construction industry.
“Project delays, concentration of risk and fixed price contracts have all played a part in business failures in the sector,” he concludes. “Companies are attempting to mitigate risk by restructuring or diversifying outside their normal scope of competency, and that in itself is creating issues.”