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Construction Industry Insolvencies Expected to Rise: Credit Insurance Considerations

As COVID-19 government support winds down and the price of construction materials continues to soar, we look at the trade credit insurance considerations.
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By Rebecca Liddle , 

Business Development Manager, Trade Credit, Marsh Specialty UK

19/07/2021 · 6 minute read

As the COVID-19 pandemic continues to challenge businesses across the UK, the construction industry has bounced back — and at a much faster pace than expected.

In May, the sector experienced the highest volume of new orders and the fastest rate of job creation, since July 2014. House building was the best-performing category, followed by commercial works, growing at its fastest rate since August 2007.

The Insolvency Service has stated that insolvencies in the UK’s construction industry, over the course of the pandemic, have been at their lowest level in a decade.

However, this trend may soon reverse, as COVID-19 government support winds down and the price of construction materials continues to soar amid scarcity of supplies.

Shortages Pile Pressure on Builders

Construction projects have proliferated since lockdown began easing, leading to deficits of key materials. For example, the Construction Leadership Council has warned that cement, some electrical components, timber, steel, and paints are all in short supply.

The shortages have inevitably led to a rise in prices, with the Office for National Statistics forecasting a 7-8% increase in material costs for this year, with timber prices expected to double.

Additionally, lead times for raw materials imported from overseas are lengthening, as global demand picks up. Demand for steel worldwide, for instance, currently exceeds supply.

Builders are also contending with a number of other issues. Brexit, for example, has affected the UK's timber supply, as 80% of softwood comes from Europe. Shipping costs have risen sharply, due to a shortage of containers, partly brought about because empty containers were not collected during the pandemic.

In addition to severely disrupting supply chains, these market conditions may lead to an increase in late payments and drive builders to use unknown vendors, all of which have insurance ramifications. The Federation of Master Builders has already warned that shortages may mean some construction companies have to delay projects, while others could be forced to cease trading.

Financial Challenges Lie Ahead

The construction industry is also likely to face significant financial pressures in the coming months as government interventions introduced in the pandemic end.

Organisations are required to pay tax deferred under the government’s VAT deferral payment scheme introduced in March 2020, either in full now, or via a repayment plan. Some companies may find themselves in financial difficulty over the coming months, as they try to cover their VAT liabilities.

Companies also have to factor in the recently implemented VAT reverse charge, whereby customers account for VAT themselves, rather than suppliers charging VAT and passing it on to HMRC.

The construction sector has heavily utilised government financial provision during the pandemic. HMRC said construction companies claimed just under £1.2 billion for furloughed staff over six months to April 2021. Provisional figures show that 30% of construction companies, amounting to 72,800 entities, were still using the Coronavirus Job Retention Scheme (CJRS) on April 30. This translates to 166,600 workers, or 13% of the sector’s workforce, relying on the scheme. The industry also made £1.9 billion of claims through the Self-Employment Income Support Scheme.

Without this help, it is likely that a large number of building companies would have collapsed, as the pandemic took hold. Therefore, the unwinding of this support will present the sector with huge challenges, with ready and affordable finance needed to replace this borrowing to aid short-term liquidity.

As financial pressure mounts in the sector, the need for solid operating cash flow will be as relevant, as it has ever been. Prompt payment and supply chain support is something that has not been prevalent in the sector for years. However, there will need to be improvements in these areas, to limit insolvency numbers.

Businesses most likely to ride out this crisis are those that are able to secure the working capital and liquidity required for continued trade, while also protecting their balance sheet from bad debt. The latter can be supported by a trade credit insurance policy.

Construction companies can also utilise credit insurance to check on the financial health of new and potential customers, by using the insurer’s credit intelligence and grading systems. This information can act as an early warning system for suppliers.

Key Takeaways

Businesses should not be lured into a false sense of security by the low construction insolvency rate, at present, as there is a strong consensus that a higher number of business failures will emerge in the coming months. 

The need for resilience against insolvencies is paramount. A trade credit insurance policy will go a long way in providing some safeguards, including:  

  • Improved access to receivables financing.
  • Protection against non-payment of goods or services supplied on credit terms.
  • Ability to leverage real-time information that credit insurers hold on customers to support credit management and sales.
  • Mechanisms allowing for the extension of payment terms to a wider range of customers.

If you have questions about trade credit insurance, please contact your Marsh representative. 

Meet the author

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Rebecca Liddle

Business Development Manager, Trade Credit, Marsh Specialty UK

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