Although the industry is known for firms going under, the wider picture shows the problem is less severe, writes Barrett Harris.
The construction industry has consistently topped the list for company insolvencies in Great Britain. Although the number of insolvencies from January to September 2024 decreased by 3.7% compared to the previous year, it remains the industry with the highest absolute figure.
It is however necessary to consider the scale of the sector to gain a more comprehensive understanding of this issue. Construction comprises a vast number of companies, many of which are relatively small. This naturally contributes to a higher overall insolvency count.
When examining the insolvency rate, which measures insolvencies relative to the total number of companies, construction ranks third with an insolvency rate of 1.3%, behind accommodation (2.6%) and manufacturing (1.7%). This suggests that, proportionally, insolvencies in construction are not as severe as initially perceived.
While insolvency statistics provide valuable insights, they only represent about 10% of the businesses leaving the industry. The Office for National Statistics (ONS) tracks business ‘deaths’, which encompass all types of dissolutions, including insolvencies, whereas insolvency statistics only relate to companies listed on Companies House. This way, the ONS measure of business ‘deaths’ provides a fuller picture of companies exiting the industry.
Despite this, the net balance of business ‘births’ less ‘deaths’ has been positive over the past six quarters, indicating a growing industry. However, there have been periods, particularly since 2020, where ‘deaths’ outpaced ‘births’, leading to a temporary contraction. More recently, the trend has shifted back to positive net growth, which points to a recovering industry.
Industry impact
Since this measure began in Q1 2017, there have been only three instances where business ‘deaths’ outnumbered ‘births’. This trend has been mainly influenced by the reduction of government aid after the covid pandemic and the onset of the conflict in Ukraine, leading to a negative net balance and a contracting industry.
However, from Q2 2023, ‘births’ have consistently exceeded ‘deaths’, signalling a recovering industry with a positive net balance. This suggests that the market is expanding, as the number of new entrants outweighs the combined impact of insolvencies and exits.
Nevertheless, the effects of both insolvencies and business ‘deaths’ can have a significant impact on the industry, particularly for larger companies. These events can delay projects and negatively affect the remaining businesses.
In this challenging market environment, clients should take a more proactive role in managing their supply chains. By adopting sophisticated commercial models that position contractors and key trades as partners rather than mere suppliers, clients can foster collaboration, share risks and rewards equitably, proactively address challenges and ultimately enhance project delivery.
The focus should be on creating effective supply chain strategies and commercial models to drive success. Managing the entire supply chain and identifying potential risks is a crucial responsibility.
Barrett Harris is an economist at Turner & Townsend.
