Friday May 24, 2024

Why are contractors struggling?

Construction continues to be the most exposed UK industry when it comes to the risk of insolvency, with the latest figures from the Insolvency Service highlighting more than 4,000 cases in April alone (up 17% year-on-year). The sector has had a bruising 12 months and, while it is reasonable to believe that a large number of the businesses captured in the data are likely to be smaller operators, there are also significant challenges at play for those operating at scale.

With their inextricable link to the residential sector, contractors working in the Modern Methods of Construction (MMC) space are an interesting case study. Indeed, despite being held up as fundamental to meeting the government’s target of building 300,000 new homes every year, recognised brands like House by Urban Splash, L&G Modular Homes, Ilke Homes and Caledonian Modular have halted production or gone into administration in recent times.

An investigation by the House of Lords Built Environment Committee, which works to review government policies relating to housing, planning, transport and infrastructure, has explored the issue and its findings reflect the conversations we are having with industry. Critically, while the committee found that MMC could still play an important role in the building of much-needed housing, the reasons that it isn’t currently are many and varied.

Challenges for MMC builders

Perhaps most notable among the committee’s findings is the concern that MMC isn’t currently generating the cost savings that were promised, with one housing association reporting that MMC delivery estimates could in some cases be 30-50 per cent higher than traditional methods of construction.

That in particular has contributed to a ‘Catch 22’ situation where many MMC companies have struggled to generate a secure pipeline of work that would help them achieve the economies of scale that would in turn enable them to reduce their prices. At the same time, firms reported that potential customers could be reluctant to engage manufacturers that had yet to turn a profit, over concerns they could cease operating before fulfilling contracts. Similarly, warranty providers, insurance companies and lenders also have their part to play but are naturally risk averse – something contractors have suggested isn’t helped by a lack of data and understanding in relation to MMC products.

More broadly, the skills shortage experienced across the wider construction sector was also raised. For MMC specifically, skills bottlenecks materialise at the point when modules arrive on site to be integrated into groundworks.

On site issues

The challenging environment for MMC businesses is discussed by Chris Everett, Managing Director of CCI International, an expert witness and advisory consultant specialising in construction, in our latest sector report Resilience to recovery: The future of UK construction.

Chris discusses some of the other practical issues that have caused MMC companies to fail in recent times – in particular, the challenges of ‘just in time’ delivery to building sites. Any on site delays that prevent the delivery of modules can create significant problems for manufacturers due to congestion within production lines.

In some circumstances, modules may need to be stored outdoors for a number of months so production can continue, causing severe weather damage to completed modules and introducing the potential for repairs and contractual disputes.

Signs of improvement

Despite these challenges, there is cause for optimism.

The government remains committed to the idea of MMC, which has proven a success in the non-housing construction sector. Meanwhile, a universal specification for MMC key components and design elements has been promoted as a way to achieve economies of scale more quickly and overcome the concerns of warranty providers, insurance companies and lenders. That has been delayed but is now expected by late 2024.

Ultimately, it’s likely that the MMC sector’s fortunes will be closely linked with those of the wider housebuilding sector and current mortgage rates. As such, those in the sector will be keeping a close eye on the Bank of England’s next rate decision, which is due in the coming weeks, as they continue to weather the storm.