Market Focus: Insolvency Warning Signs
The UK’s second largest construction company, Carillion PLC, went into liquidation on 15th January 2018.
As well as threatening thousands of jobs it has the potential for significant impact on construction projects including Aberdeen Bypass, the Library of Birmingham and Tate Modern as well as many hospitals, prisons and schools.
The impact of Carillion’s failure on the construction industry has not been fully realised. In the short-term, several projects remain at large and creditors unpaid, leading to potential financial difficulties for suppliers and sub-contractors.
The liquidation of Carillion may cause a ripple effect throughout the supply chain, and we may see smaller contractors, sub-contractors and suppliers who were working with Carillion experience cash flow difficulties which could translate into further insolvencies.
In the aftermath of Carillion’s demise we have seen a number of other contractors issue profit warnings. Insolvency risk within the construction industry remains high. The overall number of UK company insolvencies increased by 4.2% in 2017 and individual voluntary arrangements were up 2%.
All clients should work with their advisors to ensure projects have financial checks and guarantees in place to highlight any warning signs, along with adopting fair payment terms for all parties to ensure commercial viability.
The warning signs of insolvency generally fall into two categories – “tangible” signs (those which can be seen) and “intangible” signs (those which are harder to pin down as they are generally subjective). One of these signs alone may not be sufficient to raise the alarm, but the more warning signs seen, the greater the risk. Insolvency can happen very quickly in the construction sector and it is important to be prepared.
For further advice please contact your G&T Partner.
To read our 2018 Q1 TPI and previous Tender Price Indicators, please visit our publications page.