Insolvency - A Growth Industry

As the subprime crisis in America sweeps across the Atlantic causing a significant credit squeeze in the UK, one of the first sectors in the firing line is construction. Construction across the UK appears to have fallen victim to the economic uncertainty that exists and latest figures show the sector shrinking for the first time in more than six years.
 
 

As the subprime crisis in America sweeps across the Atlantic causing a significant credit squeeze in the UK, one of the first sectors in the firing line is construction.
Construction across the UK appears to have fallen victim to the economic uncertainty that exists and latest figures show the sector shrinking for the first time in more than six years.

 
The Chartered Institute of Purchasing and Supply (CIPS) said its Construction Purchasing Managers’ Index – which measures activity – was 47.2 in March, the first reading below the growth mark of 50 since 2001.
 
Vinden, a construction-consultancy with offices in Nottingham and Bolton, predicts that construction will be hit hard and the housing market will see the biggest slowdown since the slump of the early 1990s. Figures just released by Halifax (08.04.08) show that on average house prices fell by 2.5% in March 2008, the biggest single reduction since 1992.
Director and Head of Insolvency, David Vinden believes there are strong signs that the sector is already suffering, with small developers and sub contractors struggling to survive in an increasingly competitive market.
He said that there are a number of reasons over the next 12 months which will test companies in this sector more than at any other time in recent years.
He commented: “The reduction in house prices, the significant decline in the numbers of new units being built, the lack of credit for small to medium type developers and the decrease in the number of people working in this sector all indicate that much uncertainty is likely to prevail in the short term. It is also likely that margins for sub contractors will continue to be eroded due to increased competitiveness.”
 
Vinden, whose services range from dispute management, construction procurement contract management and corporate recovery, is preparing itself for a significant upturn in demand for its insolvency services.
Francis  Turton,  Vinden’s  Joint MD said the East Midlands – Nottingham, Derby, Leicester and Lincoln – faces a rocky ride amid tighter lending conditions, which could affect firm’s refinancing plans. Other factors which could tip companies over the edge include rising energy prices and competition from abroad.
This point is echoed by BDO Stoy Hayward, who has seen a sizeable increase in insolvency and administration work in the first quarter of 2008.
Dermot Power said: “The economy has been extremely benign for the last ten years and there are initial signs of panic which means companies which are lame, sick or wounded will not survive.”
Predictions also point to a large number of jobs being lost in the residential sector by the end of the decade. Experience has shown that when there is a significant over-capacity in the construction sector, contractors slash their tender price in order to win work. The danger is that some may slash their prices too much and end up being loss making. While over-capacity in the industry creates its own issues, another problem facing contractors is that developers may have paid too much for property sites at the height of the boom, and will now struggle to earn a profit. The developers’ only option may be to squeeze the contractor as much as possible. Given the issues facing contractors in this sector, it is more important than ever that they fully understand the terms of the contracts that they enter into.
 
Vinden, which has an unrivalled reputation in this sector, urges businesses to take a more proactive attitude towards early intervention when things go wrong.
David Vinden commented: “Companies need to be brave enough to recognise the warning signs and seek help.
“Don’t fool yourself that nobody will notice the problems your business is experiencing. Mapping techniques and account monitoring is now widely used by most banks.”
Francis also admitted that early intervention can be a tough decision, especially if a company is still making a profit, albeit a declining one.
 
He added: “If insolvency is to be avoided, it’s not about crisis management; too often this will result in your company becoming insolvent and being broken up. Instead, it’s about profit improvement through timely operational and financial restructuring of your business while it’s still solvent. Those are the companies that will survive.”
 
If you would like to find out more about Vinden visit www.vinden.co.uk or call David Vinden on 01204 362888
 
For further information please call Jenny Sheriston on 0115 9375652 or 07799 177980.
Download