The construction industry was building the foundations for a recovery prior to the Covid-19 pandemic, but with the future now looking increasingly uncertain, CVR Global’s Jason Maloney considers how the industry can keep on the straight-and-narrow during one of the most unprecedented periods in history.
UK construction took the unwanted label of having the most insolvencies for 2019 – laying bare how thin the profit margins of contractors and sub-contractors are, as well as the domino effect of devastation that can be caused if a single construction project stalls.
The uncertainty attached to Brexit was the Achilles heel for a lot of construction projects, but in recent months there were signs that the tide was starting to turn in a more favourable direction.
The Insolvency Service’s Company Insolvency Statistics for January to March this year recorded a fourth consecutive quarterly fall in construction insolvencies. The industry still ranks first for the most insolvencies – recording 3,077 in the past 12 months – but crucially, construction insolvencies had been on a consistently downward trend.
The Covid-19 pandemic arrived just as construction looked as if it was getting back on its feet via a mixture of residential and commercial projects, but, that said, there are still signs that the industry can continue to go from strength-to-strength over the coming months.
The vast majority of sites closed around the start of the Coronavirus lockdown are now starting to re-open, with major building players opening up sites where possible.
This is good news, as the general consensus of the industry was that at the start of lockdown, on average, firms could survive for around two months based on cash reserves and debts for work undertaken in January and February.
It would therefore appear that with sites re-opening, large-scale insolvencies may be averted in the immediate term with work starting again on sites that were started pre-lockdown.
There were some concerns that work on sites could be difficult to start if supplies could not be sourced, however there are conflicting views on how big a problem this could be. At the time of the lockdown, inventories of suppliers were at their seasonal peak (as an example, bricks are made over the winter in anticipation of supplying in spring).
The number of contracts awarded during the first five weeks of lockdown was 613, which is 22 per cent down on the previous five week period, and 31 per cent down on the same 5-week period last year, however the overall value of contracts awarded was higher in the five week lockdown period than previous five week period – mainly caused by HS2’s formal notice to proceed.
The longer-term fortunes of the industry are of course uncertain. For example, due to the current damage caused to the economy, it is difficult to predict the demand for new houses in the private sector. It may take some time for this demand to return, as it is so heavily influenced by a booming economy and people having jobs to afford a deposit and mortgage.
Steps have been taken to minimise a post-lockdown economic lull. The government has offered unprecedented levels of financial support to businesses – such as furloughing and the bounce back loan scheme – to give them the opportunity to trade after the lockdown.
It’s this financial support that could well see a continuation of the declining insolvencies that were reported in the insolvency service’s latest company insolvency statistics from January to March, which showed an 8.5 per cent year-on-year fall.
From a construction perspective, the first step to safeguarding the industry is a commitment from the government to large-scale infrastructure projects, such as HS2 and affordable housing.
This commitment is underpinned by there being robust social distancing measures in place – as without those – projects are unlikely to be able to commence.
The potential is there for construction to thrive, but like so many other industries, it is reliant on a strong economy. The question on everyone’s lips is, how long will it take for the economy to get to this point?