The price adjustment formulae is a method of calculating the increase, or decrease, in contractors’ costs over any period. The formulae and indices (over 200 of them) are widely used in various sectors in the construction industry, including civil engineering contracts and facility management.
Published: 01/05/2024
Construction firms accounted for 16.6% of all insolvencies in England and Wales in February 2024, according to the Insolvency Service, with 350 registered construction businesses becoming insolvent.
In the year to February 2024, the total number of construction firms becoming insolvent was 4,403. This was an increase of 5.7% on the 4,164 insolvencies recorded in the year to February 2023, and a 36.8% increase on the 3,218 in 2019.
Of all cases where the industry was captured in the statistics, construction experienced the highest number of insolvencies in the year to February 2024.
Source: The Insolvency Service
In Scotland, there were 18 construction company insolvencies in March 2024, accounting for 15.7% of all insolvencies. This was one fewer than in February 2024, and the same number as in March 2023.
The total for the 12-month period up to March 2024 was 203, which was a 1.9% decrease on the 207 insolvencies in the year to March 2023, also a 1.9% decrease on the 207 in 2019.
Source: The Insolvency Service
By rough comparison, in 2023, construction firms accounted for 13.8% of all registered businesses in the UK, suggesting the industry is still disproportionately affected by insolvency.
Within the construction industry, firms categorised as providing specialised construction activities are consistently the most affected across Great Britain. This includes companies providing a range of work, typically on a subcontract basis, from demolition and site preparation, to electrical and plumbing installation, and finishing work like plastering, painting and glazing.
The Insolvency Service also publishes figures for Northern Ireland, but not with sector breakdowns.
Analysis by EY-Parthenon on profit warnings issued by listed construction companies has shown particular vulnerabilities in the industry.
In its 1Q2024 report, it revealed the Household Goods and Home Construction FTSE sector had experienced among the highest number of profit warnings.
Its analysts stated: ‘Warning levels are still high in sectors that rely on the ability and confidence of business and consumers to spend. Inventory levels are also still high and will take time to dissipate. Historically national elections have also led to a spending hiatus, adding further risk to this mix.’
It also pointed to uncertainty around conflict in the Middle East and disruptions to trade in the Red Sea as potentially impacting on the economic outlook for 2024.
A multitude of factors feed into company insolvency, though analysis of profit warning data by EY suggests the construction industry is particularly exposed to financial difficulty. This is in part due to the nature of contract cycles and the challenges of cash flow management that contractors and subcontractors are subject to.
Further data released by The Insolvency Service also showed that of the 1,470 self-employed bankruptcies in the year to January 2024, almost one-quarter (348, 23.7%) were in the construction industry. These were particularly in the building completion and finishing work category, which accounted for 42% of all construction bankruptcies.
An effective way of mitigating the risks associated with fixed-price contracts when costs are so changeable is to use fluctuation clauses linked to work category and resource-specific inflation indices, such as the BCIS Price Adjustment Formulae Indices (PAFI).
The data in these indices, covering more than 200 work activities across building, civil engineering, specialist engineering and highways maintenance, can also be used throughout the budgeting and procurement stages to plan cash flow more effectively.
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