Nearly 8,000 building firms on the verge of insolvency as construction becomes UK's second worst performing sector

Critical financial distress among UK construction companies grew rapidly in the last quarter of 2023, according to a new analysis.

The number of companies in a precarious financial position rose by a third, according to the Begbies Traynor ‘Red Flag Alert’ report, which provides a snapshot of British corporate health.

The news may have significant repercussions for anyone planning on building a house in the UK.

How poorly is the UK construction industry performing?

The number of building firms at risk of going into insolvency grew 32.6% to 7,849 in Q4 2023, according to the latest data from Begbies Traynor, the business recovery specialists.

The construction and real estate sectors still represent nearly 30% of all businesses in critical financial distress.

As well as construction, critical financial distress grew rapidly in the health and education (+41.3%), real estate and property services (+24.7%), and support services (+23.6%) sectors.

Why is UK construction struggling?

Interest rates and rises in building materials prices, as well as a decline in demand for new housing, are key factors in the slowdown.

Julie Palmer, Partner at Begbies Traynor, said: “Many small businesses live and die by cashflow, and late payment can quickly go from a problem to a crisis.

“This is especially true in the construction sector where there is a large proportion of SMEs, who often have to make big outlays on materials to get the job done and then have to hold on for payment.

“Throw in the rising costs of building materials and increasing labour rates, and it is easy to understand why the construction sector has one of the highest rate of companies in significant financial distress.

“Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.

“As we saw in the previous quarter, the strain being placed on companies has extended well beyond the consumer-facing businesses with bellwether sectors, like construction and real estate, now in serious jeopardy as over 15,000 businesses face high risk of failure.”

What does the future of construction look like?

Housing market predictions for 2024 forecast this pressure on the construction sector is unlikely to ease, according to an industry forecast from construction market analysts Glenigan. 

They predict there will be an 8% increase in construction levels from 2023 levels, which in turn will create higher demand for construction materials, raising prices further.

Meanwhile, house prices are expected to continue their 2023 decline in prices into 2024 with prices predicted to fall by 2-4%, according to Halifax.

Ric Traynor, Executive Chairman of Begbies Traynor, said: “We are seeing insolvency rates starting to accelerate in the UK and our own empirical data highlights how this trend is likely to speed up in 2024 as the environment takes its toll on businesses.

“Later this year, we could see some respite for companies as inflation looks like it may reach more palatable levels which in turn should result in interest rates starting to climb down from current heightened levels.

“Unfortunately, there are no signs of an easy fix and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop is hardly improving for an economy that is still firmly in recovery mode post-pandemic."