Why are so many construction companies closing their doors in such a buoyant market?

​London has lost 962 firms in the property and construction industry since September 2010 and, figures from Deloitte show that, 133 of them went into administration in the first six months of 2015.

Most experts believe that property companies are going into administration mainly as a consequence of winning work on contracts at dangerously low margins. Other factors like the increasing costs that come hand in hand with the booming industry, the fact that, since the recession, it is far harder for property companies to borrow from the banks (unless they are in the very top tier) and the strains in cash flow have also been part of the problem.

Although, there has been some improvement across the sector in recent years, many major property and construction companies, which have a combined turnover well in excess of £650m, have been forced to call in the administrators in 2015. The GB Group, Fairhurst Ward Adams and Longcross are just a few of the biggest businesses that recently went bust.

GB Group, the developer of care homes, student accommodation, residential, hotels and leisure, education and commercial, which had a turnover of £200m, went into administration in March 2015. At that time, the company was still engaged in a number of schemes, including a £34m project to build over 700 student homes for Kings College London and employed over 300 staff. Almost three-quarters of its work was repeat business with clients and had won a number of contracts in 2014. The news came as a complete shock and one subcontractor said: “We got paid only a week ago and it seemed like things were going along fine on the job. Then last night a security team suddenly turned up at last knockings and locked everything up.”

Longcross, the well reputed contractor went into administration in June 2015 after the bank withdrew its support. Longcross made its name in the retail sector by winning a string of contracts with major supermarkets. The company actually won a large Sainsbury’s job just days before the news broke. But, latest accounts for Longcross Group stated the firm was actively looking for work outside its core food retail market which accounted for 35% of revenue. Results for the year to March 31 2014 show Longcross made a pre-tax loss of £1.25m on a turnover of £231m. A spokesman for specialist credit reference agency Top Service said: “We have been advising our members not to give credit to Longcross for some time due to the large number of adverse reports we have been receiving, particularly over the last few months.”

Fairhurst Ward Adams, the ‘Queens Builder”, went into administration at the beginning of July 2015 due to “severe cash flow difficulties.” The firm built up a countrywide reputation for delivering renovation and refurbishment of historic properties, plus luxury new build projects. The company worked on some of the UK’s finest historic buildings including the National Galley, the V&A and Chatsworth House. Sources said it “appeared to have lost control of costs across the board” after a period of rapid expansion. In recent years, the builder perhaps grew too quickly and was projecting to raise turnover from around £50m to over £80m while the business swung from a pre-tax profit of £297,666 to a loss of £1.6m due to “a number of loss-making contracts”.

Aytan Hilton, a Senior Resourcing, Recruitment and Talent specialist who has worked as a consultant for a number of leading construction businesses has his own thoughts on this issue. He believes that loss leading bids and tenders, the decreasing market dominance by the bigger players due to increased competition from smaller firms, as well as the poor management which focuses more on quick individual wins rather than long term corporate gains have all been major factors that influenced many property and construction companies to close their doors.

Fortunately, it is not all doom and gloom for the property and construction sector. The number of construction companies going into administration seems to have slowed down since the beginning of 2015 but, according to insolvency experts, businesses need to be aware that more of them could go into administration as problem contracts negotiated during the recession play out.