By Marcus Leach
New research released on Thursday has revealed that mid-sized construction companies have been hardest hit since 2007.
Experian’s snapshot analysis of the construction sector between 2007 and the present day shows that mid-sized firms, with 26-50 and 51-100 employees, lack the flexibility and low overheads of smaller players, yet struggle to compete with the financial clout and resources of their larger rivals.
The analysis has also revealed that although insolvencies within the sector have stabilised, the overall financial strength has dropped to a lower level than during the 2009 slump, led mainly by the mid-sized businesses.
The smallest and largest firms within the construction sector were the least affected, seeing lower comparative insolvency rates than the mid-sized firms.
Key highlights from the analysis include:
· The largest firms (501 employees or more) saw their financial strength score remain above 80, indicating relatively robust financial health
· The smallest firms (up to 10 employees) saw their average score fall as low as 78.6 in May 2010, but these firms still managed to outperform or match the average score for the sector as a whole during 2007-2011
· Mid sized firms — with 26-50 and 51-100 employees - saw their scores fall as low as 77.3 and 76.6 in January 2010, but both categories have seen a moderate improvement since, rebounding to reach 78.14 and 78.34 by June 2011
· Companies with between 26-50 employees were the most at risk during the period, with an average insolvency rate of 1.11 per cent since 2007
· Regionally, the North East of England proved to be the least resilient area of the UK for construction, consistently showing the highest insolvency rate since 2007 — 0.7 per cent of the total business population.
“The challenging conditions in the construction sector mean that competition is now fierce and larger firms are bidding for the smaller contracts that they would have normally passed on," Simon Streat, Managing Director of Experian’s UK SME business, said.
“As a result, both the smaller and mid-sized companies are having to look further and wider for new business and offer more competitive prices than their larger counterparts. Smaller construction firms that have lower over heads and more flexibility are managing to work around this, but mid sized firms are finding their revenues increasingly squeezed while still having to maintain the same basic outgoings.
“The fact that insolvencies have stabilised is a positive sign, but with financial strength of these firms remaining at a low level, it indicates that they are not out of the water quite yet. It’s vital, therefore, that these vulnerable mid-sized businesses take action now to safeguard their operations. This means changing the way their find new and target customers and tying new customers into robust and stringent contracts to protect against late or non-payment.
“It is also wise for these firms to pay close attention to economic data such as insolvency rates and financial strength scores. This data often points to the areas of the country where profitable contracts can still be found, as well as the areas where businesses need to exercise caution before pursuing a contract.”
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