Insolvencies soar as inflation woes compounded by end of covid support

The number of construction companies going into administration has more than doubled within a year, as firms feel the pressure of rising costs and covid loan repayments.

According to the Insolvency Service, there were 307 insolvencies in the construction sector in February 2022, a 142% increase on the 127 insolvencies in the same month last year and a 6% increase on the monthly average for the last quarter of 2021.

The biggest name to fold in February was 46-year-old contractor Midas, which made more than 300 redundant as it collapsed into administration.

The coming months could see the figures rise even higher, with Begbies Traynor’s latest red flag alert report warning of a rise in construction sector firms in financial trouble.

According to the insolvency specialist’s report, the number of firms in the sector in critical financial distress in the first quarter of 2022 was 51% higher than the same period the previous year – a rise which is significantly above the 19% economy-wide increase.

Across the whole UK economy, county court judgments – a warning sign of future insolvencies – grew by 157% in the first three months of the year, compared with Q1 2021.

Paul Atkinson, partner at restructuring specialist FRP Advisory, said labour shortages resulting from Brexit, along with rapid energy price inflation, had exacerbated construction’s traditional struggles with low margins and skill shortages, pushing some firms over the edge.

“Certainly, if I was in the sector, I would be keeping a close eye on the KPIs now more than ever,” he said.

Atkinson added that many smaller firms were feeling the impact of the end to covid-era support from the government, such as bounce-back loans and deferrals for payment of VAT.

“A lot of businesses now have got to the point where they are unsustainable with that level of debt,” he said.

John Bell, founder and director of insolvency firm Clarke Bell, said the latest figures were unsurprising given the economic climate. Like Atkinson, he attributed the significant year-on-year rise in insolvency numbers to the end of government supports.

“Once furlough came to an end and the bounce-back loans had to be repaid, a lot of companies have hit real problems,” he said. “Despite the support packages, they haven’t bounced back.

“The construction sector has for the last few years, at least, accounted for about 20% of the total number of company insolvencies.

“So, it is no surprise that is the case now. The sector still faces difficulties from things like raw material prices, supply chain issues, old debts, labour shortages and other companies facing bankruptcy and owing them money.

“As the economic difficulties continue, I would expect the number of insolvencies to continue to rise for the construction sector, and most sectors, for the coming months.”

Sector insolvency numbers were highest for firms involved in the construction of buildings, with figures for February 2022 rising on the previous month (11%), the previous quarter (19%) and on the same month last year (176%).

Meanwhile, civil engineering insolvencies dropped compared with the previous month (-23%) and quarter (-27%) but were up 42% on February 2021.

Begbies Traynor partner Julie Palmer predicted a “wave of insolvencies” unless there was action to help businesses mitigate economic pressures. “It’s just a case of when the dam holding it back finally bursts,” she said.

Palmer said the government could ease pressures by taking a lenient approach to the repayment of pandemic funding.

“We could see an approach similar to war bonds, with terms being extended as ministers follow the adage that a rolling loan gathers no loss,” she said.

“Taking a hard line on repaying CBILS [the coronavirus business interruption loan scheme] and other loans would likely drive businesses over the edge, risking the billions fed into the economy being wasted, and the legacy of this support probably explains the year-on-year fall in significant financial distress.”