Construction in the North East: steps for firms to build resilience

Last year saw the construction industry face significant challenges, insolvency levels were up with over 5,000 company failures and nearly 23,000 companies in distress by the last quarter.

Construction businesses in the North-East had the second highest sector insolvency rates, with an estimated 540 companies suffering from distress in the last quarter of 2022 –  the highest of any sector.

This distress has now come to fruition with the recent insolvencies of two of the North East’s largest main contractors, Metnor Construction and Tolent Construction.

With any main contractor failure, the knock-on effect can be devasting for the supply chain which, given the existing sector challenges, may see further failures on the back of the so called “domino effect.”

In a recent article, Business Live North East highlights some of the immediate blows being experienced by sub-contractors and suppliers from these failures. It is still early days and the supply chains of both these businesses are spread nationally so worryingly the full impact is yet to be seen.

This will be a troubling time for many subcontractors and suppliers. Whilst the chances of repayment of any outstanding debt will still be unknown, returns from construction insolvencies are notoriously low and can take a number of years. As such, the time to act is now and whilst every business will have its own agenda, some actions to be considered include:

• Speaking to the insolvency practitioner to understand whether they are continuing any contract, the employer is taking on any contract or if it is being novated to a new party. There may be an opportunity to leverage repayment for continued services or supply but be aware that the insolvency practitioner can require you to continue with a contract under the ipso facto legislation on your current contract terms!
• Check your terms and conditions to see if you have reservation of title and request to undertake a site visit to identify your goods. This is a complex area of law, and title may have passed to the employer even if you can see them on site.   
• You may wish to approach the employer directly to see if they require your continued services or supply as this can minimise project disruption and delays.
• Review your business model and cash flow. Understand how your business can function in the short and longer term without this customer, loss of income and non-payment of any debt. Are there any quick wins or is there a cash shortfall and how can it be managed?
• It may also be appropriate to approach your key stakeholders including your lender or suppliers if you require support but ensure that you have a plan and can demonstrate what is needed and why!

Finally, don’t panic and take early professional advice to understand and assess your options. A restructuring adviser will have experience in similar situations and should be able to guide and support you throughout.