Protect against insolvencies
The nature of payment and contract cycles in the construction industry has played a substantial part in the disproportionately high number of insolvencies in the past four years. Between January 2019 and August 2023, construction businesses accounted for 13.5% of all insolvencies. The tight margins many construction companies operate in exposes them to the risk of inflation, which could be mitigated by the use of index inflation adjustment clauses in their contracts.
Even some of the largest contractors with turnovers £700m aren’t immune. In August this year, news that Buckingham were on the brink of collapse – whose previous works included the Spurs stadium and ArcelorMittal Orbit – surfaced.
The company blamed ‘deep losses and interim cash deficits on three major contracts’ for its problems. Since then, it’s collapsed into administration with nearly 450 jobs lost, due to the divisions administrators couldn’t sell on.
In addition, JLR Group, reported recently that their profit fell more than 50% – its lowest level since 2015. EY Parthenon – who have 20 years of profit warning data – says that the construction industry is particularly vulnerable to financial difficulty because of its exposure to contract cycles that leave them operating in tight margins.
However, this doesn’t make such high levels of profit warnings inevitable, as they warn the contracts that trigger profit warnings often have ‘flaws in their inception and execution.’ This alludes to fixed-price contracts that, in a difficult economic climate, some contractors have understandably felt under pressure to accept.