The construction industry is one of the sectors bearing the biggest brunt of the economic downturn. In the year to December 2023, more than 4,000 construction businesses in the UK were declared insolvent, accounting for roughly one in six company insolvencies.
It’s a concern that things appear to still be on a downward trend. Construction industry insolvencies were up 5.1% in 2023 compared to the previous year. The final quarter of the year also saw a sudden leap in the number of trade businesses reporting financial stress, up by a third compared to Q3.
According to the RICS Construction Monitor, the challenges the industry is facing mostly centre around a slump in housing development, especially in the private sector. However, there are some moderate signs of optimism, with infrastructure projects on the rise, and anticipated cuts in interest rates this year sparking hopes that housing demand could start to rise again.
More so than many sectors, the construction industry gets buffeted by ups and downs in the wider economy. Macroeconomic trends play a major role in investment decisions for construction and infrastructure projects, with investors and lenders quick to hit the pause button as soon as inflationary pressures threaten their carefully curated ROI calculations.
Closer to home, firms are subject to significant volatility in materials prices, with the high rates of inflation seen over the past couple of years cutting deep into margins. Another big challenge has been an ongoing skills shortage in the industry, which has pushed the cost of labour up.
Playing the long game with financial planning
With a certain degree of volatility baked into the economics of construction, firms of all sizes have to play the long game. Sole traders and SMEs in the sector don’t need reminding about the importance of planning finances in the long term. One big project could easily be followed by a fallow period. It’s vital that everything from pricing to cost control is considered with one eye on the future.
This is a lesson that firms of all sizes can take on board. And planning your long-term strategy from a dip rather than at the top of the curve is no bad thing. When everything is being squeezed, you have no choice but to think lean and focus on optimising cost efficiencies. It’s the only way to protect your margins.
But driving efficiency across your business also pays dividends when things start to pick up again. With unnecessary costs removed, you can cash in and build your reserves to a point where you will remain stable even through the next dip.
At the same time, there’s never a bad time to plan for growth in business. Thinking about growth might seem ambitious when work is thin on the ground. But again, this is the best time to think about making your business as competitive as possible, and what you can do to maximise your chances of winning the next project that becomes available. Implementing a growth strategy means not waiting around for the better times to arrive. It means proactively preparing for them.
At Xeinadin, implementing cost controls, financial planning and growth strategies are just some of the bespoke services we offer to construction companies. Along with tax and accounting and sector-specific business advisory, we have the dedicated industry expertise to help you put your firm on the path to long-term success.
