FIS CEO, Iain McIlwee reacts to the announcement this week

The news that QBE Europe is pulling-out of the construction bonds market for major contractors is concerning, but unsurprising.  The construction market has been rocked by high levels of insolvency – most recent data has showed that 399 construction businesses registered for insolvency in April 2024, up from 315 in March and continuing a period of record highs.  We need help and the cavalry is disappearing.

The reasons for QBE’s decision are fairly clear. Construction has lurched from challenging period to challenging period, we limped out of COVID with delays costing the industry dear, we then got hit by a period of hyperinflation, people got stung on fixed price jobs (and are still struggling on jobs priced pre-or immediately post-pandemic).  The full impact was masked by some cheap credit that the COVID loans provided.  These now need to be repaid.

Material prices remain high and labour rates, which in our sector have increased by 40-50% over the last three years still ticked up by another 5% in the second half of last year.  At the same time we’ve been hit by double-digit falls in activity in housebuilding combined with aggressive procurement tactics that are trying to squeeze the supply chain.   Projects across the market are slipping due to high interest rates and concerns around legislative change and compliance in the new landscape.  The supply chain will have invested in these jobs – delays cost money.

At the same time, we still operate fixed-price contracts with fluctuation clauses struck out and deposits and PBAs rarely considered.  Contractors through the supply chain are often required to capitalise the first 60-90 days of work (by the time you factor in application dates, faff and payment terms).  With limited credit options the project relies on unsecured debt, with SME contractors in the supply chain who in turn lean on manufacturers and distribution and use other facilities like charge cards to buffer the hit.  Despite headlines to the contrary, payment behaviours have trended same old towards worse in every survey we’ve ever run and we are still using retentions to buffer it all.

We walk on thin ice when it comes to cash and the number of building firms in a precarious financial position according to Begbies Traynor ‘Red Flag Alert’ report grew 32.6% to 7,849 in Q4 2023.  That is close to 8% of firms!  In recent times we have seen big names like Henry and Buckingham Group casting a long shadow – the latest count was 1,375 claims have now been received for Buckingham Group totalling £256m, which includes significant claims from sureties providers.  Henry was around £150m and both put big dents in the availability of credit.

We are a sector constantly in survival mode.  We need a rethink about how money flows through jobs and we need to structure the supply chain to ensure that businesses can invest with foresight of pipeline and are rewarded at the right time for the work done and stuff paid for, not months later.  The Reading Report concludes that the archaic approach to contracting and procurement leaves a supply chain vulnerable, and without the means and confidence to invest in training, improvement and modernisation that would better serve the future interests of the sector’s clients. Procurement reform is essential to ensure the sector can invest, evolve and modernise – without change this is an existential crisis for construction.

This is not a problem that the new Government can afford to ignore as construction enables much of what they aspire to achieve, more homes, better health and fair distribution of wealth – we have set down some suggestions as to how we can evolve to a better way through better Government procurement and legislative reform that will help to drive better behaviours.  We are also urging companies to consider carefully the risks associated with some jobs and consider a Responsible No.

Read FIS Manifesto for the new Government: A Blueprint for a better Construction here

Find out more about the FIS campain to support better contracting: The Responsible No