Larger building contractors are moving down the food chain as contract size and numbers continue to shrink, creating increased competition, eroding margins and putting intolerable pressure on prices.

And while there is a slight yet fragile improvement within the construction sector, the number of construction insolvencies will remain high in 2011, with subcontractors particularly at risk according to the UK’s largest credit insurers, Euler Hermes UK.

The company’s comments follow an alarming rise in the number of payment delays being reported to Euler Hermes by its construction clients and figures that show that almost 21% of claims received year-to-date relate to construction. Kalpana Padhiar, Underwriting Manager for Euler Hermes UK, says that project delays, a concentration of risk and the nature of fixed price contracts all continue to cause concern:

Over the last 18 months, the construction sector has seen an increase in demand for credit insurance from new clients and emphasized the need for credit insurance to existing policyholders. Although premium rates initially rose, they have now stabilised. “While there are some encouraging signs, we do not expect any sustained period of recovery until the middle of next year at least, and in the meantime there is quite a bit of pain to go yet”.

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Recent failures such as Rok, Connaught and C.J Haughey in the UK and McNamara and Pierse Contracting in Ireland all highlight the problems being faced in the sector by construction firms. Some companies are attempting to mitigate risk by restructuring or diversifying outside their normal scope of competency: “Companies who have historically operated on a Regional Structure are suffering and are moving to an Operational Structure,” Kalpana says, “and others are diversifying either by value, by geography, or by skill set.

“The difficulty that they all face,” she continues, “is pressure on costs and the availability of new work. There are too many contractors chasing too little business, and those operating fixed price contracts are being especially badly hit by the rising cost of raw materials, notably steel.”

She also believes that the true extent of troubles within the construction industry had been hidden by the amount of public sector work available: “Over the last few years, a resurgence in public sector contracts served to mask the real extent of the underlying demand,” she says. “With public sector projects now being cancelled, the impact on the industry will be transparent and severe.”

Given the diverse nature of the construction market and the large number of companies involved in this sector it remains a large and important part of Euler Hermes UK’s portfolio. “We continue to receive proprietary information across the construction sector that places us in a strong position to provide credit limits,” she concludes.

(GK)