How Safe is your Contractor?

How Safe is your Contractor?

Dean Watson addresses concerns over the financial stability of smaller firms.

Although the construction sector for SMEs grew yet again in Q2 (April-June 2017), concerns remain over the fate of smaller contractors, with accountancy firm Moore Stephens warning that 26 per cent of construction companies could fail.

The risk of contractors going out of business by 2020 rises to 32 per cent for those involved in commercial projects compared with 23 per cent for those building residential properties. As if any were needed, this is further evidence of how continued political uncertainty over Brexit is doing the construction industry no favours, especially the ability to find buyers or tenants for new buildings.

According to the Moore Stephens report, while multinationals are assessing the pros and cons of maintaining employee levels and retaining offices in the UK, investors are reviewing demand from potential purchasers and occupiers. The attractiveness of the London office market in particular is being called into question. Smaller contractors have seen their profits hit by tightening margins due to the fall in Sterling, which has pushed up the cost of imports, especially raw materials. These businesses are also more likely to experience difficulties in accessing bank funding for projects, putting extra strain on their cash flow.

Labour supply is another key factor. Construction’s heavy reliance on migrant labour has sparked calls from industry leaders for special dispensation, since anything that restricts employers’ ability to bring in skilled workers from the EU post-Brexit is likely to inflate wages. In fact, some two thirds of construction businesses expect the skills crisis to drive up wages bills over the next six months, a notable difference when compared with the wider UK economy where, in general, earnings are stagnating.

Uncertainty over future demand, rising materials costs and the skills crisis represent a combination of factors that could make smaller contractors less viable. It is therefore vital that they act now to put in place contingency plans to ensure they have the resilience to withstand what we can only expect to be a challenging market over the next few years.

Download Vision October 2017 …