Insolvency in the Construction Industry

Here’s some concerning information about insolvency in the construction industry from the team at Burton Sweet Corporate Recovery.

Interestingly, this industry has always contributed a disproportionate number of business failures. Graham Down, Director at Burton Sweet, says that according to the most recent figures produced by the Office of National Statistics, construction output has fallen for each of the last two quarters, meaning that it is technically in recession.  They offer a free initial consultation to any business in the construction industry who is facing difficulty.

So, what are the most common causes of the high failure rate? According to Burton Sweet, they are:

  • Retention

Companies are failing to keep track of, or even chase, retentions. A Retention is a sum (commonly 5%) held back from by a client from the contractor (or the contractor from sub-contractors) so as to ensure that the contractor completes all its contractual obligations.  Half of the retention is normally released on “practical completion” of the contract with the remainder paid over at the end of a “defects liability period”.

  • Housing Grants, Construction & Regeneration Act 1996 (HGCRA)

Companies are failing to apply their statutory rights when a client or main contractor pays less than it should. The HGCRA was set up to identify poor payment practices and extensive, expensive and time-consuming disputes as amongst the key problems besetting the construction industry

  • Record keeping

Not all contracts need to be in writing, believe it or not; an oral contract is usually just as binding on all parties.  In the past, they needed to be in writing to be protected by HGCRA (see above) but that has now changed.  Consequently, disputes over contracts are difficult to resolve if there is no paper trail.

  • Over-stretching

Over-stretching has been the downfall of many well-established construction businesses due to companies taking on work outside of their usual remit when times are hard, resulting in costly mistakes, delays and having to re-do work.

  • Supervision

Even the most experienced and well-qualified employees can get it wrong sometimes.  Tendering, estimates and contract documentation need to be checked rigorously; the buck always stops at the top.  Many companies in the industry have been brought to their knees because of administrative failures before a job started.

  • Over-exposure

The construction industry is disproportionately susceptible to insolvency.  When one company fails it can bring down suppliers and sub-contractors who are owed money – the so-called “domino effect”.  Because construction businesses are often involved in just a relatively small number of contracts at any one time, they are more vulnerable because they often have all their eggs in one basket.

  • HMRC

Due to the pressures of cash flow, money set aside to pay taxes as a lump sum, (PAYE/NIC, VAT and corporation tax (or schedule D for unincorporated businesses) & the Construction Industry Scheme (CIS)), it can be tempting to use it to ease the immediate situation, making it extraordinarily difficult to recoup and catch up.

Although these are examples from the construction industry, heeding issues such as record keeping, supervision and HMRC is good practice for any business.

Extracts courtesy of Burton Sweet Corporate Recovery, E-brief August 2016