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 – 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 – September), following a fall of 0.5% from April to June, the ONS revealed (ONS)

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  1. I still think losing more than £1 billion had something to with how these companies operates. Other constructions companies are doing fine. Recently, Carillion has lost many contracts because of their poor provided services.

  2. Problem is these big multi-national construction organisations are being run by senior management whose expertise is often in other completely diverse and non connected industries. They make their money by investment and other vehicles and construction is just an opportunity to generate cash. Its an industry many of them know absolutely nothing about. Carillion and Interserve particularly, need to go back to doing what they do best and were actually quite good at….build things !.. on time and on budget !. There’s a lesson to be learned here by some of the other big players and I hope they are sensible enough to heed the warning.

  3. I fully agree with the last comments. Construction companies should be managed by Construction Professionals and not investors who see the industry as a vehicle to generate revenue. Similar situations are happening in other parts of the world, particularly in Africa.

  4. There is nothing new here. Main Contractors and large sub contractors are all crooks. They use the cash of the smaller contractors to finance projects a d dont pass the payments on, which is tantamount to THEFT. They are run by accountants who have no principles when paying out yet bleatvand cry when owed themselves.

  5. Agree with the previous comments – main contractors have lost their way. They are now seemingly reduced to managers with increasingly less construction knowledge and being little more than a highly paid middle man (mainly focused on commerce rather than quality) with the second tier supply chain actually providing the expertise and delivery. Much of the problem is that Main Contractors have bought work however their supply chain now has enough opportunity not to have to have to prostitute themselves to survive and without the big stick the main contractors have lost control. You just need to look at the ever increasing reports of new construction with significant problems to appreciate how our industry is going backwards. Maybe we all should just heed the warning and try and go back to the days where taking a pride in delivering a good job was more important that the politics and commercial management.

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