Going bust: how contractor insolvencies are affecting development and repairs

In the final quarter of 2021, a total of 866 construction firms became insolvent in England and Wales. That compares with 717 in Q3, 597 in Q2 and 403 in Q1. In the equivalent three months in 2020, 426 firms went under. Even if that is an unfair comparison because of the ongoing COVID-19 restrictions in place at the time, in Q4 of 2019, 779 firms went out of business, meaning the last quarter’s numbers are up more than 11% on two years before.

“The issue is in pricing – if they have agreed fixed pricing and they are overspending. It also leaves us with delays, and that means the costs go up. That’s not something we can claim against a main contractor. It’s messy territory when someone takes over someone else’s work”

Another 314 firms became insolvent in January 2022 (the last month for which government data is available), which is the second-highest single-month figure in three years. Anecdotally, according to housing associations Inside Housing spoke to, the situation is even worse now than it was in the winter.

Richard White, executive director of development and sales at Optivo, says two main contractors on the 45,000-home association’s projects have gone bust so far this year – one at the fit-out stage (where the interior of a building is kitted out in preparation for occupation) and the other before construction. “It is unusual,” he confirms. “In the last five years, I haven’t had a main contractor go on me, and now I’ve had two go this year.”

While there is clearly a risk to main contractors from the current economic headwinds, the vast majority of firms that have either gone bust or are at risk of doing so are subcontractors.

This tallies with the experience of Ali Bennett, development director at 7,000-home Raven Housing Trust, but she describes a knock-on effect for housing associations if too many subcontractors hit the wall. “It is subcontractors where we are seeing the biggest risk and where we have had to step in on some sites.

“In terms of main contractors, we aren’t seeing an immediate risk [of them going bust], but the issue is in pricing – if they have agreed fixed pricing and they are overspending. It also leaves us with delays, and that means the costs go up. That’s not something we can claim against a main contractor. It’s messy territory when someone takes over someone else’s work.”

Ms Bennett adds that one of the consequences of the relative unavailability of subcontractors has been a growing imbalance between supply and demand for certain types of work. “The big issue is demand,” she says. “The supply chain cannot keep pace with client demand and so prices are getting ridiculous.”

Prices of building materials

Professor Noble Francis, economics director at the Construction Products Association, tells Inside Housing that building materials prices were 27% higher in January than pre-pandemic levels, with insolvencies in the sector up 18%. He describes the cost rises as part of “a perfect storm” for smaller contractors, in particular, as the increases have come at the same time as constrained labour availability, increased insurance costs and changes to the tax regime for suppliers.

For social landlords, it is “a very challenging situation”, Professor Francis says, not least because they are committed to spending money to address fire safety issues and to fulfil their net zero carbon obligations.

“The increases in material and product costs, as well as the increased labour costs, will mean that their resource is spread even more thinly,” he says. “In addition, the delays to projects due to availability of materials, products and labour mean that there are knock-on effects onto subsequent projects and frameworks, which will then cost more and take longer.”

“There is a question mark against whether those grant rates [for building affordable homes] are sustainable, given the cost increases that we’re all suffering from”

For clients, the most obvious impact of a contractor going bust is delays. But in a climate of rapidly rising  costs, there is a danger that housing associations will have to shell out much more than anticipated to build the homes they have committed to. That is because many deals with contractors are on a fixed-cost basis, but that deal won’t necessarily carry over to a new contractor.

According to Mr White, the situation could have “a damping effect” on how much associations are able to build, especially since some of those lower costs played a part in the calculations for the most recent round of government grants.

“The prices factored into that thinking are now moving up quite sharply,” he explains. “So there is a question mark against whether those grant rates are sustainable, given the cost increases that we’re all suffering from.”

If landlords want to avoid mothballing projects, the best thing to do is work collaboratively with contractors from the outset and not let price dictate the choice of partner, according to Professor Francis.

“The key ways to mitigate the impact are to, firstly, collaborate with contractors, be open about the constraints and encourage them to be open about the cost rises,” he advises.

“Your instinct is to say, ‘No, we all entered into this with our eyes wide open.’ But you could inadvertently push somebody into administration by not working with them”

“Secondly, go with the best-value contractor, not the lowest-cost contractor. If the job is done properly first time, then it minimises costly, wasted rework.”

Flexibility required

At Optivo, Mr White agrees that landlords with big development pipelines will have to be flexible if they want to keep their programmes on track.

“I’ve had a number of contractors come to me and say: ‘Look, I know I entered into a fixed-price contract with you, [but] I would like some more money now, because we’re not making the money we thought we were going to and all the prices have gone up.’

“And that needs to be managed really carefully, because your instinct is to say, ‘No, we all entered into this with our eyes wide open.’ But you could inadvertently push somebody into administration by not working with them, so we will look carefully at a main contractor who comes to us with that kind of conversation, and it is a real judgement call.

“Particularly with small and medium-sized enterprises, it might come to the point where we will have to change terms to keep going on the site.

“In the long run, it’s about taking a pragmatic approach, rather than having someone going into administration and having to replace them at a far higher cost.”