Experian has released new research showing that mid-sized construction companies have been hardest hit since 2007.

Experian’s snapshot analysis of the construction sector between 2007 and the present day shows that mid-sized firms, with 26-50 and 51-100 employees, lack the flexibility and low overheads of smaller players, yet struggle to compete with the financial clout and resources of their larger rivals.

The analysis has also revealed that although insolvencies within the sector have stabilised, the overall financial strength has dropped to a lower level than during the 2009 slump, led mainly by the mid-sized businesses.  The smallest and largest firms within the construction sector were the least affected, seeing lower comparative insolvency rates than the mid-sized firms.

 

 

Key highlights from the analysis include:

• The largest firms (501 employees or more) saw their financial strength score remain above 80, indicating relatively robust financial health.

• The smallest firms (up to 10 employees) saw their average score fall as low as 78.6 in May 2010, but these firms still managed to outperform or match the average score for the sector as a whole during 2007-2011.

• Mid sized firms – with 26-50 and 51-100 employees – saw their scores fall as low as 77.3 and 76.6 in January 2010, but both categories have seen a moderate improvement since, rebounding to reach 78.14 and 78.34 by June 2011.

• Companies with between 26-50 employees were the most at risk during the period, with an average insolvency rate of 1.11 per cent since 2007.

• Regionally, the North East of England proved to be the least resilient area of the UK for construction, consistently showing the highest insolvency rate since 2007 – 0.7 per cent of the total business population.

Simon Streat, managing director of Experian’s UK SME business, said: “The challenging conditions in the construction sector mean that competition is now fierce and larger firms are bidding for the smaller contracts that they would have normally passed on.

“As a result, both the smaller and mid-sized companies are having to look further and wider for new business and offer more competitive prices than their larger counterparts.  Smaller construction firms that have lower overheads and more flexibility are managing to work around this, but mid sized firms are finding their revenues increasingly squeezed while still having to maintain the same basic outgoings.

“The fact that insolvencies have stabilised is a positive sign, but with financial strength of these firms remaining at a low level, it indicates that they are not out of the water quite yet. It’s vital, therefore, that these vulnerable mid-sized businesses take action now to safeguard their operations.  This means changing the way their find new and target customers and tying new customers into robust and stringent contracts to protect against late or non-payment.

“It is also wise for these firms to pay close attention to economic data such as insolvency rates and financial strength scores. This data often points to the areas of the country where profitable contracts can still be found, as well as the areas where businesses need to exercise caution before pursuing a contract.”

The largest number of insolvencies during the recession was in the real estate, renting and business activities sector, according to insolvency body R3.

With over 12,000 (12,050) real estate insolvencies, this is nearly double that of the second most affected sector – construction, at 7,184. Wholesale and retail are third with 6,077 and manufacturing fourth with 4,664 – all measured from the second quarter 2008 to the end of the fourth quarter 2009.

R3′s president Steven Law commented: “The decline in real estate massively outstrips that in any other sector. Clearly there was an oversupply when the recession took hold and, as people and businesses became less inclined to move, development projects could not be sold on.

“The real estate industry was the first key sector to be hit by the recession, and had its worst time one quarter before (Q4 2008) all the other main sectors. It is important to see these figures in context – with over 1 million enterprises, compared to just over 500,000 in the wholesale and retail industry, real estate is the largest sector, a factor in pushing insolvency numbers higher.”

When insolvencies are viewed as a proportion of the total number of enterprises in each industry:

• Hotels and restaurants top the list with an insolvency rate of 1.7 per cent
• Manufacturing is second at 1.6 per cent
• Real estate comes in fifth at 1.1 per cent

Steven Law concluded: “The findings indicate that the pain has been evenly spread, looking at these percentages. Hotels and restaurants have had the toughest time as a sector with close to two in every hundred becoming insolvent during the recession, due to their dependence on consumer spend. The manufacturing industry has also been hit very hard, but traditionally is one of the first sectors to recover.

“As a result of low interest rates and HMRC’s Time To Pay scheme, corporate insolvency numbers have started to come down this year. However, it will take until the end of 2011 before we know if there is an ‘insolvency lag’ still to work its way through. This ‘lag’ has been a typical feature of past recessions when insolvencies rise during a recovery as creditors stand to achieve greater returns and weakened businesses have used up their reserves to stay afloat.”

Construction workloads turned positive for the first time in two years, says the latest RICS survey of the industry.

Five per cent more chartered surveyors reported rising rather than falling workloads for the first quarter of 2010. This compares with a net balance of 12 per cent reporting falls in Q4 2009. This positive turnaround reverses a decline which has stretched for seven consecutive quarters and is the first time that the net balance has turned positive since the first quarter of 2008 when it was one per cent.

However, this improvement masks considerable sector variation with some surveyors reporting concerns over a lack of finance for development. The private commercial workloads net balance increased from -11 to +17 and both private housing and public housing workloads moved back into positive territory, albeit only very modestly. However, surveyors in the private industrial and infrastructure sectors reported falling workloads at -9 and -4 respectively.

There was also significant variation in performance at a regional level. Surveyors in London and the South East reported a sharp turnaround in workloads, with the net balance swinging from -15 to +21. A slightly less dramatic shift in sentiment took place in the Midlands and East Anglia, where the net balance jumped from -9 to +10 but in the North and Scotland, the net balances remained in negative territory at -7 and -6 respectively. In Northern Ireland, surveyors reported continued sharp falls in workloads, with the net balance deteriorating from -37 to -59.

Looking forward over the next 12 months, expectations for workloads are stable with the net balance increasing from two per cent to four per cent. However, expectations for employment and profits are fairly downbeat with surveyors expecting both further job losses and a contraction in margins.

Commenting Simon Rubinsohn, RICS chief economist said: “The construction sector seems to be finally lifting its head above the recession parapet but the continuing lack of development finance remains a major obstacle to a sustainable recovery with surveyors still pessimistic about future prospects. Concerns over likely cuts in public sector capital spending programmes is another factor contributing towards the cautious stance of respondents to the survey.”