Data recently published by The Insolvency Service shows that rates of general company insolvency are on the rise. In total, 22,109 companies in the UK registered some form of insolvency during 2022, reflecting a 57% increase on 2021. Construction was the worst performer of all industries, representing 19% of all cases.
Those statistics are perhaps not surprising given the headwinds which have recently buffeted the construction sector. A perfect storm of labour shortages, high energy costs and record levels of inflation affecting the costs of materials have caused headaches for contractors, who typically sign up to "fixed price" building contracts with developers. This is in addition to pre-existing issues associated with cashflow, long payment periods and low profit margins which mean the industry is particularly exposed to the risk of contractor and sub-contractor insolvency.
Given the current economic climate, we can expect to see further contractor and sub-contractor insolvencies in the short term. It would therefore be prudent for developers to remain vigilant of early warning signs that insolvencies may affect their existing projects. Slowdown in the progress of works on-site, inability to provide forms of security, evidence of delayed payments within the supply chain and requests for direct payment from sub-contractors may all indicate increased risks of insolvency.
It may also be useful for developers to remind themselves of the relevant steps to consider in the event of a contractor insolvency, especially where early warning signs have been identified. These would include, but are not limited to:
- Checking whether there are grounds to terminate any building contract in place and considering the practical ramifications this would have on the project and any third party;
- Taking steps to secure the site and any materials (including any which are being held off-site);
- Identifying any unpaid sums which have become due to the contractor at the date of insolvency to see whether all or part of such sums can be withheld from the contractor by way of a pay less notice;
- Checking who is responsible for insuring the works under the building contract and whether any additional insurance policies need to be taken out;
- Obtaining all drawings and other documents/information prepared by the contractor and its sub-contractors which may be helpful for the purpose of completing the works.
The construction industry usually has the highest quarterly number of insolvencies of any industrial grouping.
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