NuGen Properties

More than 1,000 construction firms have defaulted on Covid loans

According to research by Price Bailey, the default rate on Coronavirus Business Interruption loans (CBILS) in the construction industry is higher than any other sector of the economy.

At the same time evidence is emerging that construction industry bosses are underestimating their insolvency risk, which is contributing to more business failures.

Data obtained from the British Business Bank under the Freedom of Information Act shows that 1,084 businesses in the construction industry have defaulted at least once on their CBILS representing nearly 8% of all borrowers in the industry. This is a 40% increase in defaults in a 12-month period – 775 construction businesses had defaulted this time last year. Over 14,000 construction industry businesses were awarded CBILS of up to a maximum of £5 million each, with loan terms up to six years.

In many cases defaulting on a CBILS repayment will be the first step towards insolvency. Insolvencies in the construction industry hit their highest level in a decade in Q2 2023 (1,176).

A separate dataset analysed by Price Bailey suggests that many construction industry bosses appear to have too optimistic a view of their financial stability, which is likely to be a major factor in future business failures. Survey data reveals that construction industry bosses are becoming increasingly confident about their financial stability despite rising loan defaults and business failures. A survey of over 700 construction businesses shows that 84% think they have a low insolvency risk, up from 77% this time last year. This is despite insolvencies rising by nearly a fifth over the same period.

Chand Chudasama, a partner at Price Bailey, said: “There is a worrying mismatch between the perception many construction industry bosses have of insolvency risk and the financial reality. This is likely to be contributing to a higher level of business failures as many of these insolvencies could possibly be avoided with better risk management.

“Lack of preparation for a sudden change in fortunes caused by the loss of a large contract or the late payment of a major invoice can have fatal consequences for a business. Construction bosses must focus on maintaining live and accurate management information across all three financial statements and plug this live and historical financial data into forecasts to underpin decision making.”

He added: “It is also critical to actively manage work in progress, cash and milestone payments to get ahead of problems. A growing number of construction businesses that are highly leveraged are struggling to repay loans as interest rates rise. Higher rates will likely feed through to higher CBILS defaults, which will in turn fuel an increasing number of business failures.

“Many building contractors are tied into fixed price contracts which quickly become under-priced as inflation eats away at margins. As construction cost inflation has continued to rise, many contracts have become unviable. Larger builders with multiple sites can offset losses from under-priced developments but small builders with a single site may have no option but to deliver projects at a loss. A sizeable proportion of smaller construction businesses are finding it difficult to compete with the lower prices offered by larger businesses, with many avoiding passing on the increases for fear of tainting customer relationships. It is these businesses which are most vulnerable to cashflow problems and therefore likely to default on CBILS.”

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