Testing foundations: what are the challenges facing UK construction?

We asked Steve Baluchi, Restructuring Advisory Director at FRP Advisory for his views on the challenges facing the UK Construction industry in 2024.

The latest Construction PMI brought good news in terms of the UK sector’s performance. Although overall output continued to decline, volumes of new business were growing at the fastest level in nearly a year, and optimism within the sector was at its highest level in more than two years. This reflects green shoots in macroeconomic conditions, but businesses are by no means out of the woods yet. The last couple of years have been very challenging, both for the construction sector and the wider economy, and contractors will continue to contend with more headwinds over the months ahead.

Inflation and interest rates

As in so many industries, the double whammy of high inflation and interest rates have combined to create an existential crisis for many construction firms. Although consumer price inflation is stabilising, firms themselves may be seeing their input costs rise again on the back of wage pressures and supply chain disruption, which is feeding through to the price of raw materials.

While many businesses have built cost escalators into contracts to automatically account for inflation in the price of raw materials or labour, others are still burdened with legacy ‘fixed price’ contracts that have no room for adjustment. In these cases, firms are having to absorb input cost increases themselves, unless clients are open to re-negotiating contracts – leaving some burdened with projects that are now being run at a loss.

Meanwhile, high interest rates are both increasing the cost of capital and servicing existing debt, and dampening consumer demand. This is something felt particularly strongly by housebuilders in a cooling residential market.

The overall effect is pressure on firms’ bottom lines; pressure that’s being exacerbated by suppliers lengthening their own payment times, and – in some cases – surveyors putting extra emphasis on defects to try and reduce clients’ end costs and buy extra time to pay.

Enduring uncertainties

There’s good news on the horizon in that consumer price inflation is expected to fall sharply this year, and the Bank of England is widely anticipated to cut rates, perhaps as early as June. But any improvement, in any area, is likely to be gradual and they certainly won’t immediately fix the financial problems that businesses have developed.

Looking ahead, some businesses may experience difficulty accessing the funding they need to fuel growth plans. Many sources of financing, particularly traditional lenders, are showing more reluctance in lending to the sector. Or at least have been more closely scrutinising the current and projected financial performance of those they are lending to.

Then there’s political uncertainty ahead of the general election. Construction firms are already telling us that they are delaying investment decisions, and that clients are delaying commitments to projects. This is unlikely to be resolved until the votes have been counted, and the results are in.

The road ahead

Although the coming months will bring opportunities for growth, the watchword in many construction c-suites will be ‘resilience’. It is critical that businesses are proactively monitoring for signs of distress in their operations and their partners, and are taking quick action when the first cracks appear.

Whatever lies ahead, FRP Advisory continue to be working with construction businesses to help them navigate this landscape, work through distress as well as protect and build value for all of their stakeholders.

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How Carpenter Box can help

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Reach out to our Construction and Real Estate team on 01293 227670 for further information.