As the year progresses, the UK faces escalating insolvency issues. Tens of thousands of UK businesses are at risk of insolvency within the next year. Almost half a million businesses across various sectors are grappling with financial distress, marking a 30% surge since 2023. Particularly vulnerable sectors include construction, real estate, and support services. 

Although March saw a slight decrease in insolvencies from February, the numbers remain elevated compared to pre-pandemic levels. Further instability could push even more businesses towards insolvency. In such a situation, how has the construction industry fared recently, and are there any interesting opportunities that distressed business buyers can turn around successfully? Let’s find out. 

Sector Overview: UK Construction 

Despite an improvement in economic conditions, the construction sector still holds the highest number of company insolvencies over the past 12 months, as per the latest official data. Nearly one-fifth of all insolvencies in the past year occurred in construction, totaling 4,403 firms going under, which accounts for 18% of the UK’s total. The number of construction firms under significant financial strain has surged by nearly 40% since 2023. 

Data from Begbies Traynor says that 6,141 firms are now in critical condition, representing a 27% rise from the previous year’s 4,826. The latest insolvency data coincides with a reduction in inflation rates, with 1,815 firms across all sectors declaring insolvency last month, marking a 17% decrease from February 2024 and the same month in the previous year. These figures indicate ongoing pressure in the construction industry, despite some relief from inflation rates and material delays.

High interest rates, coupled with a stagnating economic landscape are the biggest hurdles for new projects and already strained contractor finances. While there has been a reduction in chronic materials inflation, the risk of sustained wage growth poses a threat to profit margin. Construction is likely to remain a significant contributor to future corporate insolvencies, especially with the impending election potentially slowing down activity.

This is the time to lay more importance on transparent supply chains’, especially when it comes to deciding work capacities for new orders and maintaining fair payment terms between contractors and subcontractors.

What does this mean for distressed business buyers?

Based on historical trends, without improvements in economic conditions, a substantial portion of businesses currently under ‘significant’ financial distress are likely to progress to ‘critical’ distress and potential insolvency. In such a scenario, distressed business buyers can seize strategic opportunities, such as:

Specialised Expertise: Companies facing financial distress may possess specialised expertise or niche capabilities that are valuable in the construction industry. Buyers with complementary skills or resources can acquire distressed firms to expand their service offerings or enter new market segments.

Geographic Expansion: Acquiring distressed businesses in new geographic regions can facilitate market expansion and diversification. Buyers can leverage their existing resources and networks to enter new markets and capitalise on growth opportunities in markets where the construction industry and potential for future growth is more dominant.

Access to Contracts and Projects: Distressed businesses may have existing contracts, projects, or client relationships that provide immediate revenue streams for the buyer. Acquiring these contracts can provide a stable foundation for growth and revenue generation. Moreover, consolidating operations and streamlining processes in line with existing contracts can lead to cost savings and operational efficiencies

Record Q1 Administration Filings in Scotland within Construction 

For a geography that has fared reasonably well so far this year, the latest data for businesses in Scotland reveals a concerning trend. There have been a notable increase in administrations during the first quarter of 2024, with construction firms at the top of the list.  12 administrations in Q1 is more than double from the same period last year, and this spike marks the highest number of administrations in a Q1 period since before the onset of COVID-19 in 2020.

This can be attributed to a combination of factors including reduced government support after COVID-19, mounting pressures from labour and cost inflation and cautious consumer spending. 

Cashflow has also emerged as a critical issue for construction businesses, with many struggling to manage costs and generate sufficient revenue to maintain operations. Tight lending conditions and persistently high interest rates have also acted as challenges for business recovery.

A continued upward trajectory in administration numbers is anticipated, surpassing pre-COVID levels by the end of the year. This projection underscores the magnitude of the economic adjustment underway and suggests a prolonged period of turbulence for Scotland’s business community.

Osborne Group falls into Administration

Osborne Construction Ltd, Osborne Group Holdings, and Osborne Homes Ltd have joined Geoffrey Osborne Ltd in filing notices of administration. The Osborne Group’s administration notice, reported last Thursday (18 April), cited a cash flow crisis. Geoffrey Osborne Ltd’s latest accounts revealed a £44m pre-tax loss and a turnover decrease of over £225m.

Geoffrey Osborne founded the Group in 1966 in Chichester, maintaining family control for nearly 60 years. In recent years, the Group has encountered economic challenges, leading to the sale of three divisions post-pandemic. Chairman Andrew Osborne stated that filing for administration was “the right thing to do while we continue to seek external investment.” Macfarlanes LLP represents the company.

The Group confirmed that staff will receive payment until administrators are formally appointed. The company stated, This decision was reached after an 18-month program to restructure the firm to focus on the core construction business and following an extensive effort to secure new investment into the business. Negotiations are ongoing.

Osborne has faced challenges common to the entire construction industry over the past two years, including high inflation, the lingering impacts of COVID-19 and Brexit, and a slowdown in public sector procurement. Despite these challenges, the company maintained strong relationships with suppliers, contractors, and staff.

To address under-performance and protect the construction business, Osborne sold its property management division, infrastructure business, and offsite manufacturing arm, preserving over 850 jobs. Proceeds from these sales were reinvested into the construction business, which continued delivering projects in London and the southeast.

Despite substantial performance improvement, residual losses on legacy projects undermined the ability to win new work. Despite a profitable current business with a good pipeline of work, securing necessary investment to continue as a going concern has been challenging.

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