How much are construction business failures increasing and why?

Spiralling materials price rises, slowing property markets, interest rates hikes and the global skills shortage are creating a toxic mix for construction companies. Lucy Barnard finds out how the number of construction business failures is increasing across global markets.  

Governments in several countries around the world are coming under pressure to intervene to help crisis-hit construction businesses as a wave of insolvencies claims a growing number of high-profile contractors.

Builders in countries from Germany to Australia have been stricken by a toxic mix of rising interest rates, more expensive construction materials, a shortage of skilled workers and slowing demand for new developments.

German Chancellor Olaf Scholz and Federal Minister for Housing, Urban Development and Construction Klara Geywitz give a press statement before the meeting ‘’Alliance Day for Affordable Housing’’ in the Chancellery on September 25 in Berlin, Germany. Photo: Christian Marquardt/Reuters

Last month [September] the German government announced a €45 billion relief package to prop up the construction industry in Europe’s biggest economy after a string of high-profile construction and real estate companies filed for insolvency.

“We must massively expand activities in housing construction,” Chancellor Olaf Scholz told a press conference ahead of a meeting with industry leaders to discuss the crisis.

According to Germany’s Federal Statistics Office, in the first four months of the year, 437 building companies filed for insolvency, an increase of 20% compared with the same period in 2022.

Big name casualties include 125-year-old contractor Wolff Hoch und Ingenieurbau as well as real estate firms Gerch, Development Partner, Project Immobilien and Euroboden.

The government said it would make €18 billion available until 2027 for affordable housing with the rest of the funding coming from federal states and municipalities. It also indefinitely shelved proposals to require more stringent building insulation standards and said it would oppose planned EU legislation which could require millions of buildings to undergo energy efficiency upgrades.

“This package of measures addresses key points that the construction industry has been asking for and is more comprehensive than expected,” said Tim-Oliver Müller, general manager of Bauindustrie, the German construction industry association, which represents medium- to large-sized contractors in the building and civils segments.

“The main problem in this crisis is that there is simply a lack of investors liquidity. This is an essential lever for quickly finding new affordable products to give the construction industry planning security. But the truth is that, because many of these measures depend on the federal states, for these measures to come into effect it will take time which we don’t actually have.”

And Germany’s is not the only construction industry to be facing a wave of construction company insolvencies.

Australian firms are also struggling as rising materials costs make many fixed contract building projects no longer viable.

Materials costs rise as interest rates increase

Builders complain that the Ukraine War and embargoes on Russian supplies like timber, along with increasing fuel prices, have pushed up the cost of pine, glass, plasterboard, fibre cement and reinforcing steel as well as causing supply chain problems. Those prices have only recently started to moderate and, at the same time, sharp interest rate rises have slowed demand.

According to the Australian Securities and Investments Commission, 1,709 construction companies entered administration between July 2022 and April 2023, a 24.9% increase on the same period a year earlier.

High-profile casualties include civil design and building firm Lloyd Group which specialised in building schools and other government infrastructure and which went into voluntary administration in March 2023. Porter Davis, one of Australia’s largest home builders also went into voluntary administration at the same time. The Clough Group, one of Australia’s oldest contractors, which had been owned by South African company Murray & Roberts, collapsed into administration in December 2022 and its assets were eventually acquired by Italian construction company Webuild in February 2023.

State and territory governments have been facing pressure to delay implementation of the country’s new National Construction Code, which required new homes to meet minimum energy efficiency standards and to be more accessible for disabled people.

Sweden too is seeing an uptick in construction companies going bankrupt as the country’s property market continues to slow amid rising inflation and interest rates.

According to a monthly report by credit agency Creditsafe, the number of company defaults in the first eight months of 2023 rose to more than 5,000 – the highest since it started collecting data in 1999.

“The worrying trend of increased bankruptcies is continuing with no signs of abating,” Henrik Jacobsson, regional manager of Creditsafe Scandinavia, said in a statement. “Even if the year-ago figures are now getting higher, we expect the situation to remain tough.”

People gather on the steps of Parliament House during a demonstration in Melbourne, in April 2023. Families impacted by the collapse of builder Porter Davis are calling for government action. Photo: Diego Fedele/Reuters

Figures from the American Bankruptcy Institute and court reporting service Epiq Global in September show that the US too is seeing an increase in commercial chapter 11 corporate bankruptcy filings (although the ABI does not break these down by sector).

It said that the number of commercial bankruptcy filings had risen for the 13th consecutive months to August 2023 compared with the same month the previous year, rising to 2,328 in August 2023, up 14% compared to the 2,045 registered in August 2022.

ABI executive director Amy Quackenboss said that the increase in filings was a result of “economic headwinds” caused by “elevated interest rates and rising prices due to inflation.”

S&P Global also reported a growing number of corporate bankruptcies so far in 2023. The analyst which covers public companies, private companies with public debt worth more than US$2 million and private companies worth more than $10 million, reported seven real estate firms among its tally for 2023. Last year its tally for the full year was six.

Over in Japan, Tokyo Shoko Research said in July that the number of corporate bankruptcies among construction companies in the first half of 2023 stood at 785, up 36.3% compared with the same period a year earlier. The report blamed rising materials and labour costs as well as the need for companies to start repaying interest-free and unsecured loans which lenders had extended under a government programme in response to the covid pandemic. It said that overall corporate bankruptcies had risen to a five-year high. 

And in the UK, construction companies are going out of business at the highest rate in a decade, according to the country’s government agency, the Insolvency Service.

It reported that around 4,280 firms became insolvent in the 12 months to June 2023, 16.5% more than the same period a year earlier.

In August, Buckingham Group, which had been working on HS2 and Anfield football stadium, became the largest UK contractor to fail since 2018. Other contractors collapsing into administration included groundworks specialist Allma Construction and its sister company Centre Plant as well as J Tomlinson and Henry Construction Projects.

In a statement, Raj Mittal, joint administrator at FRP Advisory, said, “Despite its scale and the success achieved across a number of its divisions, the severe impact of covid and recent inflationary pressures meant that J Tomlinson was not in a financial position to continue trading and so we have had to make the difficult decision to cease operations.”

Construction business failure figures around the world:

Country Construction failure figures and time measured Percentage change
Australia According to the Australian Securities and Investments Commission, 1,709 construction companies entered administration between July 2022 and April 2023, up from 1,284 in the same period 12 months earlier. 24.9%

Innovation Science and Economic Development Canada reports BIA insolvencies among construction companies for the 12 months ending 31 July 2023 stood at 602 compared with 437 for the same period a year earlier.

France Figures published by Altares show business failure cases opened among all construction companies in Q2 2023 stood at 3,084. Compared with 2,005 the previous year. 35%

The Federal Statistics Office reports 437 building companies filed for insolvency during Jan-April 2023 compared with 350 during the same period the previous year

Japan Tokyo Shoko Research reports that the number of corporate bankruptcies among construction companies in the first six months of 2023 stood at 785, up 36.3% on the same period a year earlier 36.3%
Netherlands Statistics Netherlands said 305 construction firms were declared bankrupt by the Dutch courts in the first 8 months of the year, compared with 187 during the same period in 2022. In 2022, the total number of construction firms filing for bankruptcy stood at 341. 38.7%
Sweden Credit reference agency Creditsafe said just over 1,000 building and construction firms went bankrupt in Sweden between January and August 2023, an increase of 35% on the same period the previous year 35%
UK The Insolvency Service reported that in the year to Q2 2023 insolvencies among construction firms totalled 4,280 compared with 3,573 a year earlier 16.5%
USA S&P Global Market Intelligence reported 7 major real estate firms among its tally of US corporates applying for bankruptcy protection in the year to August 31, 2023. In 2023 the full year figure was 6. Construction was not included as a category. 14.3%

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