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Construction administrations down but experts warn problem contracts still an issue

The number of construction companies going into administration has slowed in the first half of 2015, despite a number of high-profile firms hitting the wall.

However, insolvency experts have warned that more firms could go under as problem contracts negotiated during the recession play out, while others may be in danger of not being able to afford escalating costs as construction opportunities boom.

Construction sector administrations H1 12-H1 15_Deloitte

Source: Deloitte

Figures from Deloitte show that 133 companies in the property and construction sector went into administration in the six months to the end of June 2015, a little over half as many as during the same period three years ago.

The figure marks the continuation of a downward trend, with 148 companies going into administration in H1 2014, 184 in H1 2013 and 252 in H1 2012.

Despite the improvement across the sector, major contractors with a combined turnover well in excess of £650m have been forced to call in the administrators in 2015, with PC Harrington Contractors, GB Building Solutions and Longcross Group among some of the biggest casualties for several years.

Last week, two more firms – Tyneside’s Turney Wylde Construction and Kent-based specialist Fairhurst Ward Abbotts – went into administration, putting more than 300 jobs at risk.

Click on graphic to enlarge

Major administrations in H1 2015

EC Harris head of research Simon Rawlinson said he was surprised there had not been more firms going under as a consequence of winning work on contracts at dangerously low margins.

“One element in administrations is that people had bid low and then incur losses that at some point stop the company being a going concern,” he said.

“The statistics do not suggest there has been a noticeable uptick in that kind of failure yet, [but] I would expect to see more and it is hard to say that has not happened.”

Mr Rawlinson also warned against companies expanding rapidly, as this could lead to an unaffordable increase in costs.

He said this situation could create “zombie companies that can’t borrow or generate more cash and so just tick over”.

“The problem is they are not insolvent, but they are illiquid,” he added.

For many firms that have called in the administrators, the problem has been one of cashflow, rather than a beleaguered order book.

GB Building, for one, had a sizeable book of work when it went under in March but, as the administrators’ report from May pointed out, the contractor “encountered issues with a number of legacy contracts”, putting a strain on cashflow which could not be accommodated by its £6m overdraft.

A traditional solution to cashflow-related problems – bank lending – has become increasingly hard to access for many firms outside the top tier, according to Martin Coyne, senior partner at West Midlands insolvency firm Poppleton and Appleby.

“Business generally, including construction, has just got a lot tougher since the banking crisis,” he said.

“If you need cash, the banks are just not lending. They may say they have money to lend but they are a lot tighter about who they lend to and that is only really to blue-chip [companies].”

Tight margins on which construction firms operate have made them unattractive to lenders, according to Begbies Traynor South-west regional managing partner Julie Palmer.

“My advice is to be very alert to margins and to be very wary of buying turnover”

Julie Palmer, Begbies Traynor

“If they lack money, they have the problem that construction is a quite difficult sector to lend to as you are lending against a contract that is subject to interpretation and disputes,” she said.

“That means if you do get a funding gap it is a difficult thing to plug.”

Low bidding could still scupper companies even as work has become more abundant post-recession, she added.

“My advice is to be very alert to margins and to be very wary of buying turnover.

“If you do that it might fix a short-term problem but cause a serious long-term one.

“Don’t be afraid to say no to a contract where the margins will be too small.”

A senior construction lawyer, who did not wish to be named, said that some firms were “just buying turnover to keep going through the recession”, including bidding for work too low.

Potential buyers of firms in difficulty will now wait for the administrators to step in before cherry-picking work, rather than buying the company, they added.

“A savvy investor will say, ‘Let them become insolvent, get rid of their liabilities and then we’ll buy what we want to buy’.

“Why would you buy something when you’d get all the bad bits?”

However, Deloitte restructuring services partner Lee Manning voiced optimism.

Writing in Construction News, he said he expected “to continue living in this relatively low-insolvency environment, as administration is used less as a restructuring tool for businesses.”

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