PricewaterhouseCoopers is predicting a hike in construction insolvencies in the coming months, after a slight dip in the level of business failures in Q4 2012.
In a week that brought another clutch of supply chain failures – including London-based services consultant Zisman Bowyer, Kent-based contractor GML and Leeds civil engineering contractor Hewlett – the business consultant said that the downward trend would return and worsen in the first six months of the year.
Construction firms have suffered almost 6,000 insolvencies over the past two years, with a total of 5,580 construction firms going under between the start of 2011 and the end of 2012, said PwC.
And although the last quarter of 2012 showed a 12% dip in construction insolvencies compared to Q3 2012, at 621, continued pressure on businesses is likely to mean the trend is reversed.
“Everything I see and hear suggests that cash is very tight, the supply chain is being squeezed very hard and the next year is going to be tough,” said Jonathan Hook, engineering & construction leader at PwC. “Many firms have taken on work at very aggressive prices, which is going to come home to roost if they haven’t managed to cut costs or reduced employment levels accordingly.
“I expect insolvencies to rise considerably during the first two quarters and I wouldn’t be surprised if we’re back above 700 insolvencies in Q1.”
The 5,580 overall construction insolvencies included 1,559 for general construction/civil engineering firms and 373 for plumbing firms. London remained the region with the highest number of insolvencies in Q4 2012, at 125, although this was 5.3% fewer than the previous quarter.
The findings tally with a another report published earlier this week by consultant KPMG, which found that the UK’s biggest contractors will have to make further job cuts and cost efficiencies if they are to survive the downturn.
In its latest UK Construction Barometer report, the management expert analysed the accounts and performance of the UK’s 14 leading contractors and concluded that, although the firms had managed to raise margins after 2008 by extracting extra value from their supply chains, since 2010 a scramble to stem the collapse of forward order books has severely eroded profit margins, which would lead to a fresh round of streamlining.
Richard Threlfall, head of infrastructure, building and construction at KPMG said: “Our analysis reveals that the industry did well to anticipate the downturn and take out cost in the early years of recession, even managing to drive up margins in the short term… However, those measures are now proving insufficient to offset the acute reduction in volumes of new work. Just a quick look at the development of margins in the last two years confirms the urgent need for further cost efficiency and restructuring across the industry.
“Construction companies will need to redouble their efforts if they are to prevent margins sliding further in the continued harsh market conditions.”
To bolster the bottom line, the report suggested that construction companies should embark on:
- Cost efficiency transformation programmes at group, divisional and project levels
- Restructuring, both from an organisational and financing perspective
- Pricing and bidding strategies that focus on true value drivers of end-clients
- Project value engineering
- Diversification into new markets and geographies
- Increased consolidation and joint ventures to facilitate access into specialised sectors
- Re-focusing on growth sectors such as energy and transport infrastructure