30 Oct 2017

UK construction enters recession amid warning of “biggest financial crisis in 30 years”


The UK construction industry is officially in recession now having contracted for the second quarter in row according to the latest figures from the country’s Office of National Statistics (ONS).

The data was released as the head of an influential construction supply chain body warned of the “biggest financial crisis in 30 years” as subcontractors face possible non-payment by struggling major contractors such as Carillion and Interserve.

Construction output decreased by 0.7% during the third quarter of 2017 (July to September), following a fall of 0.5% from April to June, the ONS revealed last week.

The dip occurred against the backdrop of better-than-expected gross domestic product (GDP) growth of 0.4% in the UK economy at large during the third quarter.

ONS data earlier this month for the sector for the three months to August showed construction output slipped by 0.8% compared with the previous quarter, driven by declines in new work and repair as well as maintenance activity.

Also last week came a stark warning about subcontractors getting ensnared in the cash crises affecting big firms such as Carillion and Interserve.

Chief executive of the Specialist Engineering Contractors (SEC) Group, Rudi Klein, told industry magazine Building that the pair’s troubles mean the industry is “facing possibly the biggest financial crisis I have seen in 30 years”.

He said subcontractors should be on high alert. “I would advise them to be looking out for signs such as slow payment processes and an increase in contra charges,” he said.

The UK’s second-largest contractor Carillion last month revealed pretax losses of £1.15bn ($1.5bn) in the first half of 2017. That followed the shock revelation in July that an £845m hole had opened in its finances as it made provisions to cover a suite of problem contracts.

Another major contractor, Interserve, dropped a bombshell earlier this month when it warned it may breach its banking covenants for the year after admitting it will have to lay aside nearly £200m in provisions for a string of problem energy-from-waste jobs.

The highly fragmented nature of the UK construction industry in which main contractors subcontract most work to specialists means the supply chain is vulnerable when the main contractors run into difficulty.

“My advice to them would be to chase every penny at the earliest convenience and make sure payments are made on time,” Rudi Klein said. “In a situation like this, if you are waiting 120 days for a contractor to pay you, then you could end up in dire straits.”

Klein also complained that not enough was being done to fix the problems at Carillion and Interserve. “The industry finds itself in an extremely unhealthy place. There appears to be a lack of leadership around how it can address this crisis”

Image: Construction output decreased by 0.7% during the third quarter of 2017 (July to September), following a fall of 0.5% from April to June, the ONS revealed (ONS)