BCIS CapX includes price adjustment formulae, 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: 24/09/2024
News of the demise of construction giant ISG has sent shockwaves through the industry. Beyond concerns for the directly affected workforce and what it means for existing projects, there will be serious consequences for many of the firms in ISG’s supply chain.
Six subsidiaries of ISG went into administration on 20 September, which means, if they do, they won’t enter into official insolvency statistics for some time.
Construction firms accounted for 15.8% of all insolvencies in England and Wales in July 2024, according to the Insolvency Service, with 339 registered construction businesses becoming insolvent.
In the year to July 2024, the total number of construction firms becoming insolvent was 4,373. This was a 4% increase on the 4,205 insolvencies recorded in the year to July 2023, and a 35.9% increase on the 3,218 in pre-pandemic 2019.
Of all cases where the industry was captured in the statistics, construction experienced the highest number of insolvencies in the year to July 2024.
The Insolvency Service said while the insolvency rate has increased since the lows seen in 2020 and 2021, it remains much lower than the peak of 113.1 per 10,000 companies seen during the 2008-09 recession. This is because the number of companies on the effective register has more than doubled over this period. The overall rate between 1 September 2023 and 31 August 2024 was 55.5 per 10,000 companies.
Source: The Insolvency Service
In Scotland, there were 16 construction company insolvencies in August 2024, accounting for 15.7% of all insolvencies in the country. This was eight fewer than in July 2024, and four fewer than in August 2023.
The total for the 12-month period up to August 2024 was 205, which was a 6.8% decrease on the 220 insolvencies in the year to August 2023, and a 1% decrease on the 207 in pre-pandemic 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.
It revealed 48% of companies in the Household Goods and Home Construction FTSE sector had issued a profit warning in the last 12 months, with nine in H1 2024.
Its analysts stated, though, that the balance of warnings has shifted from housebuilders towards household goods manufacturers and suppliers.
The report says while the impact of higher interest rates on mortgage payments is ‘still passing through’ and interest rate cuts have been delayed longer than predicted at the start of 2024, ‘most housebuilders have been able to adjust their business models and have been helped by easing cost pressures’.
Further, ‘Those that are still warning are mostly wrestling with delivery issues on legacy projects. But a slower pace of transactions in the housing market as a whole — and pressure on discretionary incomes — is clearly being felt strongly across the household goods sector.’
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 368, or 25%, of self-employed or trader bankruptcies in the year to June 2024 were in construction in England and Wales.
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 those available in BCIS CapX.
Our 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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